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Section 28 of Income Tax Act 1961 - Explained
Section 28 of the Income Tax Act 1961 is one of the most important provisions in the Indian tax law related to “Profits and gains of business & Profession’’ It defines the scope of income from a business or profession and its taxability. In this article, we will primarily focus on the chargeability of section 28 of the income tax act, 1961. There are some other incomes that are not directly earned from a business and profession but can be treated as income from business and profession.
What is Section 28 of Income Tax Act of 1961?
Section 28 of the Income Tax Act of 1961 is a provision that deals with the taxation of profits and gains from business or profession. It defines the scope of income that is chargeable under the head "profits and gains of business or profession" and specifies the conditions for its computation. Section 28 covers various types of incomes that arise from carrying on a business or profession, such as profits from the sale of goods or services, interest on capital, any salary, commission, brokerage, etc. due to or received to Partners from a partnership firm.Section 28 also includes certain receipts deemed to be profits and gains of business or profession, such as compensation for termination from the duty, insurance claims for loss of stock or profit, etc.
What does Business or Profession Mean under Section 28 of the Income Tax?
- To better understand Section 28, we must read two other sections of the income tax act, including Section 2(13) and Section 2(36), that define the meaning of Business and profession.
- According to Section 2(13) of the Income Tax Act, 1961, the term "business" includes any trade, commerce, or manufacture or concern like trade, commerce, or manufacture.
- According to Section 2(36), profession means any vocation that requires intellectual or specialized skills and knowledge.
What are the different incomes that come under Section 28?
Section 28 of the Income Tax Act 1961 deals with the profits and gains of business or profession. Incomes covered under Section 28 are:
- Profits and gains from any business or profession carried on by the taxpayer at any time during the previous year.
- The compensation received by a person under the following circumstances:
- Any person managing the Indian company wholly or almost its entire operations, if the person terminated from his duty or modifications in the contract or terms and conditions.
- Any person is in an agency contract with an Indian company for management, termination, or modification of his agency contract.
- Any person associated with the business and his contract with the business has been terminated, or modification of his contract terms and conditions.
- A government takeover or controlled corporation or government-owned.
- Any income from a trade, professional or similar alliance from specific services performed for its members.
- Following export incentives:
- Any profit on the sale of a license granted under the Imports (Control) Order, 1955.
- Any profit on transferring the Duty-Free Replenishment Certificate (DFRC)
- Any profit on the transfer of the Duty Entitlement Pass Book (DEPB)
- Any cash assistance received or receivable by an exporter under any scheme of the Government of India
- Any excise or customs duty re-payable or re-paid as drawback under the Customs and Central Excise Duties Drawback Rules, 1971.
- Any interest, salary, commission, bonus, or remuneration received by a partner from a firm in which he is a partner.
- The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section-40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted
- Receipt of non-compete fees for:
- Not involved in a competitive business and profession
- Not sharing intellectual property rights which may have assisted in the manufacturing and production of goods and services.
- The non-compete fees receipt does not include the following:
- Amount received on account of transfer of the right to manufacture, produce or process any article or right to carry on any business or profession, which is chargeable under the head "Capital gains";
- The compensation received from the multilateral fund of the Montreal Protocol on Substances that Deplete Ozone Layer.
- Any amount received under a Keyman insurance policy, including the amount allocated through the bonus on such policy.
- The inventory’s fair market value on the date of changeover of inventory into capital assets.
- The income received from the transfer of capital assets if the expenditure on such capital asset allowed as a deduction under section 35AD.
Frequently Asked Questions
Q- Is Income from agricultural activity come under section 28?
No, Income from agricultural activities does not come under Section 28;
Q- What is the tax rate for Income from the business and profession?
For Individual taxpayers the tax rate depends on the tax slab under which your income falls; the tax rate for income from the business and profession is the same as income from other sources in case of individual assessee.
Q- Is there any amendment in Section 28?
The Finance Bill 2023 suggests a change to section 28. The change affects clause (vi) of section 28 and explains that the clause covers situations where the benefit/perquisite is given in money or other forms, or both. The change will start on 1st April 2024.