Section 28 of the Income Tax Act: Income Chargeable Under Business or Profession
Updated: Oct 1
Section 28 of the Income Tax Act deals with the taxation of income earned from running a business or practicing a profession. It specifies the types of income that need to be reported as "Profits and Gains from Business or Profession," including income from trade, manufacturing, freelancing, and other business activities. This section helps individuals and businesses understand what earnings are taxable and ensures compliance with tax laws. In this blog, we will break down the key aspects of Section 28 and how it affects your tax obligations.
Table of Content
What is Section 28 of the Income Tax Act?
The Income Tax Act of 1961 contains a section called Section 28 that addresses the taxation of income and gains from a company or profession. It outlines the range of income that falls under the purview of "profits and gains of business or profession" and the parameters that must be met in order for it to be calculated. A partnership firm's interest on the capital, earnings from the sale of products or services, any salary, commission, brokerage, etc. that is owed to or received by Partners, and other forms of income from operating a company or profession are all included under Section 28. In addition, Section 28 covers certain receipts that are thought to constitute business or professional profits and gains, such as insurance claims for loss of stock and compensation for job termination.
Meaning of Business or Profession under Section 28
We must read Sections 2(13) and 2(36) of the Income Tax Act, which define "business" and "profession," in order to comprehend Section 28 more fully. The Income Tax Act, 1961's Section 2(13) defines a "business" as any trade, commerce, manufacture, or concern engaged in any of these activities. A profession is defined in Section 2(36) as any occupation requiring specialised or intellectual skills and knowledge.
Income Types under Section 28
Profits from Business or Profession: Under Section 28, any income received in the prior year as a result of operating a business or practicing a profession is subject to taxation. This comprises revenue from freelance work, professional fees, and earnings from the sale of goods or services.
Salary, Commission, Bonus.: The income described in section 28 includes compensation for work done in connection with a trade or profession that is received by partners in a firm as well as by individuals. These compensations include commissions, bonuses, and salaries.
Income from Particular Activities: Revenue derived from particular commercial or occupation-related activities is covered under Section 28. This can include money received by a partner from a company (such as a salary, interest, bonus, etc.) or money made through import/export enterprises.
Compensation Payments: Section 28 applies to certain compensation payments that are obtained under particular conditions. These comprise payments given in the event of a change in contracts, termination of employment, or termination or modification of agency agreements pertaining to the management of an Indian business.
Receipts under Agreements: This includes any money received under an agreement wherein the party performing the activity is compensated for not engaging in any activity related to their trade or profession, nor for disclosing their know-how, patent, copyright, trade mark, licence, franchise, or other commercial rights, such as those that could be utilised in the production of goods for sale or the processing of services.
Fair market value of inventory at the time of conversion or treatment as a capital asset: Inventory would be subject to business income tax at the time of conversion or treatment as a capital asset.
Any amount received under the Keyman Insurance policy: As an employer, an assessee's receipt of any amount under a Keyman Insurance policy is subject to taxation as business income.
Section 28 of the Income Tax Act Explained with Examples
Illustration 1: X Industries Pvt. Ltd. buys Mr. Y, its managing director, a keyman insurance policy. As Mr. Y is integral to the company's operations and decision-making, the policy protects the company's financial interests in the event of his untimely death or disability. The keyman insurance policy premiums paid by X Industries Pvt. Ltd. will be regarded as business expenses under Section 28. But under Section 28, any benefits the corporation got from the policy as a result of Mr. Y’s passing or handicap would be considered taxable income.
Illustration 2: Mr. B owns and runs a furniture manufacturing business. Furniture sales revenue is included in the major source of income, "profits from business," which is subject to full Section 28 taxation. Mr. B's payment for terminating any "agreement" with a supplier is taxable under section 28.
Objective of Section 28
The Income Tax Act lists a variety of revenue streams and transactions that fall under the category of "Profits and gains of business or profession" in Section 28. It ensures that all forms of income received from a business or occupation are liable to pay taxes. The taxable income basis is defined in Section 28, which makes it possible to determine how much tax a person or business entity pays depending on their income from professional or business activities.
Ensuring Compliance with Section 28 of the Income Tax Act
Section 28 of the Income Tax Act must be taken into consideration when it comes to corporate financial administration. Proper record-keeping is essential for guaranteeing compliance. Tax assessment makes keeping accurate financial records easier. Organisations can manage commercial enterprise activities with the aid of this strategy. It may be necessary for tax authorities to obtain record-keeping information from individuals and corporations to streamline the computation of their income and deductions. Inaccurate information provided by individuals or businesses may lead to audits and legal repercussions. Thus, maintaining record-keeping is essential to following Income Tax Act regulations. These records include documentation, such as contracts, invoices, receipts, fees, deductions, and other financial data.
Conclusion
You can quickly ascertain your taxable income from your profits or gains during a fiscal year by consulting Section 28 of the Income Tax Act of 1961. You need to be aware of all the relevant factors if your income qualifies for Section 28 taxation. The financial landscape for professionals and enterprises is shaped by this section.
FAQ
Q1. What is the tax rate for income from the business and profession?
The tax rate for individual taxpayers is determined by the tax slab in which their income is categorised; for individual assessees, the tax rate on income from businesses and professions is equal to the tax rate on other kinds of income.
Q2. What expenses can be claimed as a deduction under Section 28?
Under Section 28, one may deduct expenses that are fully and solely incurred in the course of operating a business or practicing a profession. These costs can include things such as rent, salary, wages, advertising, maintenance and repairs, and interest on business loans.
Q3. Are there any restrictions or conditions on the deduction of some expenses under Section 28?
Yes, there might be limitations or limits on some expenses. For example, depreciation on assets utilised for business activities cannot be deducted. To make sure they are accurately interpreting and abiding by the law, taxpayers are recommended to speak with a certified tax professional.
Q4. Is agricultural income included in the income from profits and gains of a business or profession under Section 28?
No, income from agricultural operations is taxed under a different head of income and is not included in the income from profits and gains of business or profession under Section 28.
Q5. What is Section 28(iii) of the Income Tax Act?
Income received by a trade, professional, or similar association from particular services rendered for one of its members is included in Section 28(iii).
Q6. What is Section 28(iv) of the Income Tax Act?
Any profit or perquisite resulting from business or the practise of a profession, whether or not convertible into money, is included in Section 28(iv).
Q7. What are the amendments to Section 28?
The Finance Bill 2023 proposes the modification to Section 28 of the Income Tax Act. The purpose of amending clause (vi) of this act is to make sure that it covers situations in which advantages or privileges are given either entirely in cash or in part in cash and other forms. This modification will take effect on April 1st, 2024.
Q8. What is the primary purpose of Section 28 of the Income Tax Act?
Section 28 of the Income Tax Act deals with the taxation of profits and gains from business or profession. It outlines what constitutes taxable income for businesses and professionals, including income from trading, manufacturing, and service activities.
Q9. How does Section 28 impact the tax treatment of income from a partnership firm?
Under Section 28, income earned by a partnership firm is taxed as part of the firm's profits. The firm is required to file its tax return and pay tax on its profits, and partners are taxed individually on their share of the firm's income.
Q10. Are there any specific exclusions or exceptions under Section 28 for certain types of income?
Section 28 does not provide explicit exclusions but specifies that income must be from business or profession to be taxed. Other types of income, such as capital gains or income from other sources, are governed by different sections of the Income Tax Act.
Q11. How should a business report income derived from the sale of goods under Section 28?
Income from the sale of goods should be reported as part of the business’s gross receipts under Section 28. This income is included in the calculation of profits and gains from business or profession and is subject to tax as part of the business’s total income.
Q12. What are the implications for a business if it fails to comply with Section 28 requirements?
Non-compliance with Section 28 can result in penalties, interest on unpaid taxes, and legal consequences. Businesses must maintain accurate records, file timely returns, and ensure proper reporting of all income to avoid such issues.
Q13. How does Section 28 treat income from speculative transactions?
Income from speculative transactions, such as trading in stocks or commodities without the intention of taking physical delivery, is considered business income under Section 28 and is taxed accordingly. Speculative losses, however, can only be set off against speculative income.
Q14. Can expenses related to foreign travel for business purposes be deducted under Section 28?
Yes, expenses incurred on foreign travel related to business activities, such as attending meetings, conferences, or exploring business opportunities, can be claimed as a deduction under Section 28, provided the expenses are necessary and directly related to the business.
Q15. How does Section 28 treat income from a partnership firm received by partners?
The income earned by partners in the form of salary, commission, or profit share from a partnership firm is taxable under Section 28 as business income. However, partners’ share of the firm's profit is exempt from tax under Section 10(2A), as the firm itself pays tax on profits.
Q16. Are losses from business or profession covered under Section 28?
Yes, losses from business or profession are also governed by Section 28, and such losses can be set off against other business income or carried forward to future years to be set off against future business profits as per the provisions of the Income Tax Act.
Q17. How does Section 28 treat income from insurance claims related to business assets?
Insurance claims received for the loss or damage of business assets are considered business income under Section 28. This income must be reported in the profit and loss account and taxed accordingly.
Q18. Can a business claim deductions for bad debts under Section 28?
Yes, bad debts can be claimed as a deduction under Section 28, provided the debts were incurred during the ordinary course of business and have been written off in the books of accounts.
Q19. Does Section 28 apply to freelancers and self-employed professionals?
Yes, freelancers and self-employed professionals are also subject to Section 28. Their earnings from professional services, whether through contracts or engagements, are considered income from business or profession and taxed accordingly.
Q20. How does Section 28 treat income from renting out commercial property?
Rental income from commercial property owned by a business can either be treated as business income under Section 28 or as income from house property under Section 22, depending on the nature of the business and the way the property is used.
Q21. Are personal expenses deductible under Section 28?
No, personal expenses are not deductible under Section 28. Only expenses that are incurred wholly and exclusively for business or professional purposes can be claimed as deductions.
Q22. How does Section 28 apply to income earned from online businesses or e-commerce?
Income from online businesses or e-commerce activities is treated as business income under Section 28, and all receipts and expenses related to the business must be reported. The same rules of tax treatment and deduction of expenses apply.
Q23. Can start-up expenses be claimed under Section 28?
Yes, start-up expenses such as market research, product development, or promotional costs incurred before the business officially starts can be claimed as deductions under Section 28, subject to specific conditions.
Q24. How does Section 28 treat income from government subsidies for businesses?
Government subsidies received for business operations, such as those for promoting exports or setting up a new business, are generally considered as business income under Section 28 and are taxed accordingly.
Q25. Is income from profession taxed differently from income from business under Section 28?
No, income from both business and profession is taxed under the same provisions of Section 28. However, certain types of expenses and deductions may vary depending on the nature of the business or profession.
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