Income from Business or Profession (PGBP): Important Income Tax Rules You Should Know

If you run a business or work as a professional such as a doctor, lawyer, consultant, freelancer, or chartered accountant, your income is taxed under the head Profits and Gains of Business or Profession (PGBP) under the Income Tax Act, 1961.

The provisions governing PGBP are mainly covered under Sections 28 to 44D of the Income Tax Act. Understanding these rules helps in proper tax planning, claiming eligible deductions, and avoiding penalties.

This detailed guide explains PGBP in simple English with examples and FAQs.

1. What is PGBP Income? (Section 28)

PGBP includes any income earned from carrying on a business or profession. It covers profits, fees, incentives, and other benefits arising from business or professional activities.

Examples of PGBP Income

• Profit earned from sale of goods or services
• Professional fees received by doctors, lawyers, architects, consultants, freelancers etc.
• Commission income
• Income from export incentives
• Income from sale of business assets
• Interest, bonus, or salary received by partners from partnership firm
• Compensation received for termination of business contracts

2. Allowed Business Expenses (Deductible Expenses)

Income tax is not calculated on total turnover. Tax is calculated on Net Profit, which is calculated after deducting eligible business expenses.

The Income Tax Act allows deduction of expenses which are incurred wholly and exclusively for business or professional purposes.

Common Allowed Deductions

Section 30 – Rent, Rates, Taxes, Repairs

• Office rent
• Electricity expenses
• Water bill
• Property tax
• Office repair expenses

Section 31 – Repairs and Insurance of Machinery

• Machinery repair
• Equipment repair
• Insurance of machinery

Section 32 – Depreciation

Depreciation is deduction allowed for reduction in value of business assets due to usage.

• Computers
• Furniture
• Machinery
• Office equipment
• Vehicles used for business

Section 37 – General Business Expenses

• Employee salary
• Freelancers payment
• Advertisement expenses
• Website development charges
• Internet bills
• Travel expenses for business meetings
• Professional fees
• Printing and stationery expenses

3. Disallowed Expenses (Expenses Not Allowed)

Certain expenses cannot be claimed as deductions while calculating business income.

Personal Expenses

• Personal travel expenses
• Household expenses
• Personal mobile bill
• Personal rent

Cash Payment Above ₹10,000 (Section 40A(3))

If payment exceeding ₹10,000 is made in cash, deduction is not allowed.

TDS Not Deducted

If tax deduction at source (TDS) is applicable on payment but not deducted, expense may be disallowed.

Income Tax and Penalties

• Income tax paid
• Late filing penalty
• GST penalty
• Any illegal expenses

4. Presumptive Taxation Scheme (Relief for Small Businesses)

To reduce compliance burden, the government introduced Presumptive Taxation Scheme. Under this scheme, taxpayers are not required to maintain detailed books of accounts.

Section 44AD – For Businesses

• Turnover up to ₹2 crore
• Limit increases to ₹3 crore if cash transactions are less than 5%
• 8% profit for cash transactions
• 6% profit for digital transactions

Section 44ADA – For Professionals

• Gross receipts up to ₹50 lakh
• Limit increases to ₹75 lakh if cash receipts are less than 5%
• 50% profit considered as taxable income

5. Tax Audit under Section 44AB

• Business turnover exceeds ₹1 crore
• Limit increases to ₹10 crore if cash transactions are less than 5%
• Professional receipts exceed ₹50 lakh

6. Books of Accounts Requirement (Section 44AA)

• Cash book
• Ledger
• Journal
• Bills and invoices
• Bank statements
• Expense receipts

7. Advance Tax Applicability

• 15 June – 15%
• 15 September – 45%
• 15 December – 75%
• 15 March – 100%

8. Important Compliance Points

• Maintain proper invoices
• Keep record of expenses
• Use business bank account
• File ITR on time
• Deduct TDS wherever applicable
• Choose correct tax regime
• Maintain GST compliance if applicable

Frequently Asked Questions (FAQs)