Computation of taxable income from business and profession involves various steps and considerations as per the provisions of the Income Tax Act, 1961 in India.
The first step in computing taxable income from business and profession is to determine the gross receipts or turnover. Gross receipts refer to the total revenue generated from the business activities, including sales, fees, commissions, and any other income earned during the financial year.
Once the gross receipts/turnover is determined, eligible business expenses are deducted to arrive at the gross profit. Deductible expenses include costs incurred for the purpose of the business or profession. Some common deductible expenses are:
- Cost of Goods Sold (COGS): For businesses involved in the sale of goods, the cost of acquiring or producing those goods is deductible. This includes the cost of raw materials, direct labor, and manufacturing overhead.
- Rent and Lease Expenses: The amount paid as rent or lease for business premises, machinery, equipment, or vehicles can be deducted.
- Salaries, Wages, and Employee Benefits: The salaries, wages, and other employee benefits paid to employees engaged in the business are deductible expenses.
- Repairs and Maintenance: Expenses incurred for repairs and maintenance of business assets, such as buildings, machinery, and equipment, can be deducted.
- Advertising and Marketing Expenses: Expenses incurred for advertising, marketing, promotions, and branding activities are deductible.
- Depreciation: Depreciation expense is allowed for the wear and tear, obsolescence, or depreciation of business assets over their useful life. The depreciation deduction is calculated based on the applicable rates and methods prescribed by the Income Tax Act.
- Interest Expenses: Interest paid on loans or borrowings used for business purposes is deductible. However, interest on certain unauthorized loans or loans from specified persons/entities may be disallowed.
- Insurance Premiums: Premiums paid for business-related insurance policies, such as fire insurance, liability insurance, or business interruption insurance, can be deducted.
- Professional Fees: Fees paid to professionals such as accountants, lawyers, consultants, or other professional service providers are deductible.
- Travel and Conveyance Expenses: Expenses incurred for business-related travel, including transportation, accommodation, and meals, can be deducted.
- Bad Debts: If there are debts that have become irrecoverable, they can be deducted as bad debts subject to prescribed conditions and procedures.
- Other Allowable Expenses: There may be various other business-related expenses that are allowed as deductions, such as office expenses, telephone and internet charges, courier charges, bank charges, and legal expenses.
It is important to maintain proper records and supporting documents for all deductible expenses to substantiate the claim during tax assessments.
After deducting the eligible expenses, the depreciation adjustment is made. The net profit or loss is adjusted by adding back the depreciation expense deducted earlier and subtracting the current year’s depreciation expense calculated based on the applicable rates.
Any other incomes earned by the taxpayer, such as rental income from properties, interest income, or income from investments, should be included in the computation of taxable income.
Deductions and Allowances:
Once the net profit or loss from the business or profession is computed, certain deductions and allowances are applied to arrive at the taxable income. These include:
- Deductions under Section 30 to Section 43D: The Income Tax Act provides specific deductions and allowances for different types of businesses and professions. For example, deductions are available for scientific research expenses, expenditure on patents, copyrights, trademarks, and other eligible business-related expenses as specified in the relevant sections of the Income Tax Act.
- Deductions under Chapter VI-A: Taxpayers engaged in business or profession are also eligible for deductions under Chapter VI-A of the Income Tax Act. These deductions include popular provisions such as deductions for contributions to the National Pension Scheme (NPS), Employees’ Provident Fund (EPF), Public Provident Fund (PPF), life insurance premiums, medical insurance premiums, donations to charitable institutions, and various other specified deductions.
- Presumptive Taxation Scheme: Taxpayers meeting specific criteria can opt for the presumptive taxation scheme, as discussed earlier. Under this scheme, a certain percentage of gross receipts or turnover is considered as the presumptive income, and no further deductions are allowed. This scheme simplifies the computation of taxable income for eligible businesses and professions.
Set-off and Carry Forward of Losses:
If the net profit is negative, i.e., a loss is incurred, it can be set off against income from other sources in the same financial year. If there is still a loss remaining after set-off, it can be carried forward to subsequent years and set off against future profits for a specified period, subject to certain conditions and limits.
Tax Rates and Tax Liability:
After arriving at the taxable income, the applicable tax rates are applied to calculate the tax liability. The income tax rates and slabs vary based on the nature of the taxpayer (individual, partnership firm, company, etc.) and the total income earned. The income tax rates are periodically updated through the annual Union Budget presented by the Government of India.
Filing of Income Tax Return:
Once the taxable income and tax liability are determined, the taxpayer is required to file an income tax return in the prescribed format. The income tax return should reflect the details of the business or profession, including the computation of income, deductions claimed, tax payments made, and other relevant information.
It is important to note that the computation of taxable income from business and profession involves various provisions and considerations under the Income Tax Act. Taxpayers engaged in business activities should maintain proper books of accounts, retain supporting documents, and ensure compliance with tax regulations. Seeking professional advice from accountants or tax experts is recommended to accurately compute taxable income and fulfill the statutory requirements.