- Income from salary/pension: This includes basic salary, taxable allowances, perquisites, and profit in lieu of salary, as well as pension received by the person who himself/herself has retired from the service. Incomes from salary and pension are included in the computation of taxable income.
- Income from business/profession: This includes actual and presumptive incomes from business and professions that individuals do in their personal capacity and is added to taxable income after adjustment of the deductions allowed.
List of Incomes Classified under Profits and Gains of Business or Profession
The following incomes will be chargeable to income tax under the head “Profits and gains of business or profession”:
- Profit and gains of any business which was carried on by the assessee at any time during the financial year
- Any compensation or other payment due to or received by:
- Any person in connection with termination/modification of an agreement for managing the whole or substantially the whole of affairs of an Indian company or any other company.
- Any person holding an agency in India for any part of the activities relating to the business of any other person at or in connection with the termination or modification of the terms of the agency.
- Any person for or in connection with the vesting in the Government, or in any corporation owned by or controlled by the Government, under any law for the time being imposed, of the management of any property or business.
- Income derived by trade, professional or similar association from specific services performed for its members. This is an exception to the general principle that a surplus arising to a mutual association cannot be regarded as income chargeable to tax.
- Export incentives which include:
- Profits on sales of import licenses granted under Imports (Control) Order on account of exports.
- Cash assistance, by whatever name called, received or receivable against export.
- Duty drawbacks of Customs and Central Excise duties.
- Any profit on the transfer of the Duty Entitlement Pass Book Scheme.
- Any profit on the transfer of the Duty Free Replenishment Certificate.
- Value of any benefit or perquisite, whether convertible into money or not, arising during the course of the carrying on of any business or profession.
- Any interest, salary, bonus, commission or remuneration due to or received by a Partner of a Firm from the firm in which he is a partner.
- Any sum received or receivable in cash or in kind under an agreement for:
- Not carrying out activity in relation to any business or profession.
- Not sharing any know-how, patent, copyright, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or services.
- Any sum received under a Keymans Insurance Policy including the sum allocated by way of bonus on such policy.
- Any sum whether received or receivable, in cash or kind, on account of any capital asset being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under Section 35AD.
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Classifying Income Under Profits and Gains of Business or Profession
In case the taxpayer is not able to find a type of income under the list above, the following conditions can be used to verify if an income would fall under Profits and gains of business or profession. According to Section 28, the following are the main clause that requires an income to be charged under profits and gains of business or profession:
- There should be a business or profession.
- The business or profession should have been carried on by the assessee.
- The business or profession should be carried on for some time during the financial year.
- The charge is in respect of the profits and gains of the financial year of the business or profession.
- The charge extends to any business or profession carried on by the assessee whether under the taxpayer’s own name or otherwise.
Under Section 28, one of the main aspects on determining if an income must be classified under profits and gains of business or profession is that if a business was carried on by the assessee at any time during the financial year. It is, however, not necessary that the business is carried out throughout the financial year or till the end of the financial year.
Other Income Classified as Profits and Gains of Business
There are certain exceptions to the above rules. The following incomes must be classified under Profits and Gains of Business, even if a business was not carried on by the assessee during the previous year.
- Recovery against any loss, expenditure or trading liability earlier allowed as a deduction.
- Balancing charge in case of electricity companies.
- Sale of a capital asset which was used for scientific research.
- Recovery against bad debts.
- Any amount which is withdrawn from a Special Reserve.
- Receipt of discontinued business in the case of assessees who are making use of a cash system of accounting.
- Income from house property: An income tax assessee can own one or more house properties. These house properties can be self-occupied or rented out or even vacant. This head describes the rules relating to such ownership. The rules under this head describe how rent from one or more house properties is to be treated for the purpose of calculation of taxable income. It also describes how interest on home loan is to be accounted for in the case of self-occupied, rented out and vacant properties. An income tax assessee can claim certain deductions such as municipal taxes and a standard deduction for house maintenance in certain cases. The final net income or loss under this head is then added to or deducted from the income from the other heads.
- Income from other sources: This includes incomes like interest from a savings account, fixed deposits (FDs), family pension etc., which are included in the taxable income.
- Income from Lottery, Betting, Race Horse etc.: Such incomes are included in the total income, but excluded from taxable income as different tax rates are applicable on these types of income.
- Capital Gain: Capital gains arise at the time of selling capital assets like gold, house properties, stocks, securities, mutual fund units etc. Depending on the types of capital assets and the period of holding, gains on the sale of such assets are categorized as short-term and long-term capital gains. Although capital gains are part of income tax, they are not added to taxable income, because except short-term capital gains on the sale of debt funds, other gains are taxed at different rates.
Filing of Income Tax Return (ITR) is compulsory for earning individuals or entities, depending on their earning capacity. The Income Tax Return needs to be filed on prescribed ITR Forms. For AY 2019-20, there are six ITR Forms
- ITR-1: This ITR form is also called “Saral” and is for resident Indians having Income from Salaries, one House Property, Other Sources (interest, family pension etc.), and Agricultural Income up to Rs 5,000. This form does not apply to an individual who has invested in Unlisted Equity Shares or is a Director in a company or has a total income of over Rs 50 lakh.
- ITR-2: This ITR form is applicable to Individuals and HUFs who don’t have income from profits and gains of business or profession.
- ITR-3: Individuals and HUFs having income from profits and gains of business or profession need to use this form.
- ITR-4: This form applies to resident Indian Individuals, HUFs and Firms (other than LLP) having income from Business and Profession up to Rs 50 lakh, which is computed under sections 44AD, 44ADA or 44AE. An Individual, who is either a Director in a company or has invested in Unlisted Equity Shares, can’t use this form.
- ITR-5: This form applies to assesses other than Individual, HUF, Company, and persons filing the ITR-7 Form.
- ITR-7: This form is applicable for the persons, including companies, who required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) of the Income Tax Act.