Section 26 of the Income Tax Bill, 2025- Profits and Gains of PGBP           

Section 26 of the Income Tax Bill, 2025 is the most important of the provisions dealing with the scope of income which is chargeable to income tax as business or profession Income. The provisions of section 26 of Income Tax Bill, 2025 are similar to section 28 of the Old Income Tax Act, 1961. Section 26 describes the cases where any income will fall under the purview of “Profits and Gains of Business or Profession”. Let’s have an understanding of section 26 of the Income Tax Bill, 2025:

What is section 26 of the Income Tax Bill, 2025?

Section 26 of the Income Tax Bill, 2025 provides the base for taxation of the income earned from business or professional activities carried on by a taxpayer. This section outlines the scope of the incomes to be classified as income from business or profession. Section 26 helps in deciding whether any income will fall under the purview of the head “Profits and Gains of Business or Profession”.

If any income falls within the scope of section 26 of the Bill, such income will be taxable in India as business or professional income as per the provisions prescribed in the sections 28 to section 60 of the Bill.

What are the types of income covered under section 26 of the Income Tax Bill, 2025?

Following incomes are covered under section 26 of the Income Tax Bill, 2025 as below:

• Profits & Gains of business or Profession: Any Income from any business or profession carried on by the assessee at any time during the tax year is covered under section 26. It includes the incomes namely business income, professional income and even freelancing income.

• Compensation: Following compensation or other payment due or received in connection with the termination or modification of terms and conditions shall be covered under section 26 in the following cases :

1. Managing wholly or substantially the affairs of an Indian company;
2. Managing wholly or substantially the affairs of any other company in India;
3. Holding any agency in India for any part of business of any other person;
4. For any contract relating to business

Further, any compensation or payment, due to, or received by, any person for vesting of the management of any property or business in the Government, including any corporation owned or controlled by the Government shall also be chargeable to tax under section 26.

• Income derived by a trade, professional or similar association from specific services performed for its members.

• Duty Drawbacks & Export Incentives: Any profit on sale of input license, cash assistance against export, duty drawback or duty remission or any other export incentive, received or receivable shall be treated as “Business or Professional Income” under section 26.

• Benefits or Perquisites of business or profession: The value of any benefit or perquisite arising from business or exercise of a profession, whether convertible into money or not and whether in cash or in kind, shall be treated as a PGBP income. For example: Suppose, A company provides free foreign tour to dealers on achieving targets. Such foreign tour will be treated as a business income of the dealers.

• Salary, Commission, Interest etc. to partners: Amount of interest, salary, bonus, commission or remuneration due to or received by a partner from the partnership firm shall be regarded as a business income in the hands of the partner, if the firm is eligible and has claimed deduction of such amount while computing the income of the firm in the income tax return.

• Receipt of Non-Compete Fees: Non-Compete fees due or received under an agreement in cash or in kind for the following shall be taxable under section 26 as below:

1. For not carrying out any activities in relation to any business or profession;
2. For not sharing any know-how, patent, copyright, trademark, license, franchisee or any other business or commercial right, or information or technical know-how likely to assist in the manufacture or processing of goods or services.

However, the Non-Compete fees shall not cover the following:

1. Consideration received on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession which is chargeable under the head “Capital Gains”.
2. Any sum received as compensation from the multilateral fund of the Montreal Protocol on Substances that deplete the Ozone layer under the United Nations Environment Programme.

•  Sum received under keyman insurance policy:  Any sum received under a keyman insurance policy including bonus on such policy shall be chargeable to tax under section 26.

• Conversion of inventory into capital asset: Where inventory held in business is converted into capital asset, fair market value of the inventory on the date of conversion shall be chargeable under the head PGBP.

• Income on transfer of a capital asset: Any sum received or receivable in cash or in kind in respect of a capital asset other than land, goodwill or financial instrument which is demolished, destroyed, discarded or transferred shall be chargeable as PGBP if the whole of the expenditure incurred on such asset has been allowed as a deduction under section 46.

• Speculative transactions: Where speculative transactions carried on by the assessee are of such nature to constitute a business, the speculation business shall be deemed to be a distinct and separate business from any other business.

Note: There is an exception in section 26 of the Income Tax Bill, 2025 which states that income from letting out of a residential house or a part of it by the owner will always be chargeable to tax under the head “Income from House Property”.

Disclaimer: The above information is meant for educational purposes only. Readers are requested to act diligently and under consultation with any professional before applying the information contained in this article. For any support mail at: support@taxwink.com