Computation of Income under "Profits and Gains of Business or
Profession" (PGBP)
Income Tax Act, 1961
(Applicable for businesses, freelancers, professionals, and entities not covered under
"Salary" or "House Property")
1. Core Principles
Applicability: Income from trade, commerce, manufacturing, profession (e.g., CA,
doctors), freelancing, or vocation.
Basis of Calculation:
oAccounting Method: Cash or mercantile system (Sec 145).
o Adjusted Net Profit: Start with book profit, then add disallowances and
subtract allowable deductions.
Key Formula:
PGBP Income = (Net Profit as per Books) + Disallowances – Allowable
Deductions
2. Allowable Deductions (Sec 30–37)
Deduction Conditions/Limits Examples
Rent, Repairs, Factory rent, machinery
For business premises/equipment
Insurance repairs
Salaries, bonuses, PF/ESI contributions Must pay PF by due date
Employee Costs
(Sec 36(1)(va) (Sec 43B)
Loan for machinery
Interest on Borrowings Capital or business loans
purchase
Advertisement &
No limit for genuine expenses Digital ads, billboards
Marketing
Deduction Conditions/Limits Examples
Research & 100% deduction for in-house R&D (Sec
Pharma research costs
Development 35(1)(i))
Must be written off in books (Sec Unrecovered client
Bad Debts
36(1)(vii)) payments
Depreciation As per Sec 32 (see Table 4 below) Plant, buildings, vehicles
3. Key Disallowances (Sec 40, 40A, 43B)
Disallowed Expense Provision Reason
Cash Payments > ₹10,000 Sec 40A(3) To curb black money
Personal Expenses Sec 40A(2) Not for business
Unpaid Taxes/Dues Sec 43B Only deductible on actual payment
Employee PF/ESI not paid by due date Sec 43B Must be paid by 15th of next month
Fines/Penalties Sec 37(1) Illegal payments (e.g., traffic fines)
4. Depreciation (Sec 32)
Rates (WDV Method):
Asset Type Rate Example
Buildings (Factory) 10% ₹10L factory → Depreciation = ₹1L
Computers/Software 40% ₹2L laptop → Depreciation = ₹80,000
Vehicles 30% ₹8L car → Depreciation = ₹2.4L
Asset Type Rate Example
Intangible Assets (Patents, Copyrights) 25% ₹4L patent → Depreciation = ₹1L
Conditions:
Asset must be owned and used for business.
Additional Depreciation: 20% for new plant/machinery in manufacturing.
5. Computation Steps
1. Start with Net Profit (as per profit & loss account).
2. Add Back Disallowances:
Expenses disallowed under Sec 40, 40A, 43B.
o
o Personal drawings.
3. Deduct Allowable Expenses:
Deductions under Sec 30–37 not debited in books.
o
o Unrecorded depreciation (as per IT rates).
4. Adjust for Incomes:
o Subtract non-business income (e.g., dividends).
6. Practical Examples
Example 1: Basic Computation
Net Profit (Books): ₹5,00,000
Disallowances:
Cash payment to supplier: ₹15,000 (Sec 40A(3))
o
o Personal car fuel: ₹30,000 (Sec 40A(2))
Deductions:
Depreciation not claimed in books: ₹50,000 (Sec 32)
o
PGBP Income:
₹5,00,000 + ₹15,000 + ₹30,000 – ₹50,000 = ₹4,95,000
Example 2: Professional Income (CA Firm)
Net Profit (Books): ₹12,00,000
Disallowances:
o Unpaid PF (due 15 Apr, paid 20 Apr): ₹2,00,000 (Sec 43B)
Deductions:
o Depreciation on office equipment: ₹1,50,000
PGBP Income:
₹12,00,000 + ₹2,00,000 – ₹1,50,000 = ₹12,50,000
Example 3: Manufacturing Business
Net Profit (Books): ₹20,00,000
Disallowances:
o Penalty for pollution violation: ₹50,000 (Sec 37(1))
Deductions:
o R&D expense: ₹3,00,000 (Sec 35)
o Additional depreciation (new machine): ₹4,00,000
PGBP Income:
₹20,00,000 + ₹50,000 – ₹3,00,000 – ₹4,00,000 = ₹13,50,000
7. Special Cases
Presumptive Taxation (Sec 44AD):
o For businesses with turnover ≤ ₹3 crore: Declare 6%–8% of turnover as
income (no books required).
Freelancers/Professionals (Sec 44ADA):
o Declare 50% of gross receipts as income (if receipts ≤ ₹75 lakh).
Loss Set-off:
o Business losses can be set off against other heads (max ₹2 lakh/year under
new regime).
o Unabsorbed losses carried forward for 8 years.
8. Compliance Essentials
Books of Accounts: Mandatory if income > ₹2.5L or turnover > ₹25L (Sec 44AA).
Audit: Required if turnover > ₹10 crore (business) or receipts > ₹50 lakh
(profession) (Sec 44AB).
ITR Forms: ITR-3 (for businesses) or ITR-4 (presumptive scheme).
� Pro Tip: Maintain separate books for business/personal transactions. Track deadlines
for PF/ESI payments to avoid Sec 43B disallowances.
New Regime Alert: Presumptive taxation is available, but other deductions (e.g.,
depreciation) are forfeited.
