Income Tax Act 2025: Section 26 for Tax Year 2026-27

Income under head “Profits and gains of business or profession

[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]

Section 26(1) of Income Tax Act 2025

26(1) The income from any business or profession carried on by the assessee at any time during the tax year shall be chargeable to income-tax under the head “Profits and gains of business or profession”.

Section 26(2) of Income Tax Act 2025

26(2) The income under sub-section (1) shall include––

• (a) the profits and gains of any business or profession carried on by the assessee at any time during the tax year;
• (b) any compensation or other payment, due to, or received,

by any person by whatever named called,––

• (i) wholly or substantially managing the affairs —
  • (A) of an Indian company; or
  • (B) in India, of any other company; or
• (ii) holding any agency in India for any part of business activities of any other person; or
• (iii) for any contract relating to business,

in connection with termination of management, office or agency or contract, as the case may be, or modification of terms and conditions relating thereto;

• (c) 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 under any law in force;
• (d) income derived by a trade, professional or similar association from specific services performed for its members;
• (e) the amount of any profit on sale of input licence, cash assistance against export, duty drawback or duty remission or any other export incentive, received or receivable;
• (f) the value of any benefit or perquisite arising from business or the exercise of a profession, whether—
  • (i) convertible into money or not; or
  • (ii) in cash or in kind or partly in cash and partly in kind;
• (g) an amount being interest, salary, bonus, commission or remuneration, by whatever name called, which is due to, or received by, a partner of a firm from such firm to the extent allowed under Chapter IV-D as a deduction in computing the income of the firm;
• (h) any sum, received or receivable, in cash or in kind––
  • (i) under an agreement for not carrying out any activity in relation to any business or profession, not being–
    • (A) a 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”;
    • (B) 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, as per the terms of agreement entered into with the Government of India; or
  • (ii) under an agreement for not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature, or information or technical know-how likely to assist in the manufacture or processing of goods or provision for services;
• (i) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy;
• (j) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the manner, as prescribed; and
• (k) any sum which is received or receivable in cash or kind, when––
  • (i) a capital asset other than land or goodwill or financial instrument, is demolished, destroyed, discarded or transferred; and
  • (ii) the whole of the expenditure on it has been allowed as a deduction under section 46.

Section 26(3) of Income Tax Act 2025

26(3) Where speculative transactions carried on by an assessee are of such nature to constitute a business, the business (herein referred to as speculation business) shall be deemed to be distinct and separate from any other business.

Section 26(4) of Income Tax Act 2025

26(4) Any income from letting out of a residential house or a part of it by the owner shall not be included in income under sub-section (1) and shall be chargeable only under the head “Income from house property”.

FAQs on Section 26 of Income Tax Act 2025

1. What is the scope of income chargeable under Section 26(1)?
Income from any business or profession carried on by the assessee during the tax year is chargeable under this head.

2. Is it necessary for the business or profession to be carried on throughout the year?
No. Even if it is carried on for a part of the year, the income is chargeable under Section 26(1).

3. Can income from speculative business be treated as regular business income?
No. As per Section 26(3), speculation business is deemed distinct and separate from other businesses.

4. Is rental income from residential property included under business income?
No. Section 26(4) specifies that such income shall be chargeable under the head “Income from house property”.

5. What types of compensation are included in business income?
Income includes compensation for:

• Termination/modification of management, agency, or contract (26(2)(b))
• Vesting of business/property in Government (26(2)(c))

6. Are receipts from managing a company considered business income?
Yes, if the person is substantially managing affairs of a company in India or an Indian company (26(2)(b)(i)).

7. What if someone receives compensation for giving up a business contract?
Such compensation is included as income unless it’s for a capital asset (26(2)(h)(i)).

8. Are trade associations taxed on fees collected from members?
Yes, if they are for specific services provided (26(2)(d)).

9. Are export incentives taxable under business income?
Yes, benefits like input licence profit, duty drawback, etc., are taxable (26(2)(e)).

10. Is the value of a benefit or perquisite taxable if it’s not in cash?
Yes. All benefits—monetary or otherwise—are included (26(2)(f)).

11. What about a partner’s salary or commission from the firm?
These are taxable in the hands of the partner if allowed as a deduction for the firm (26(2)(g)).

12. Are “non-compete” payments taxable under business income?
Yes, unless exempt under the exceptions in 26(2)(h).

13. Are Keyman insurance policy proceeds taxable?
Yes, including any bonus received (26(2)(i)).

14. What happens if business inventory is converted into a capital asset?
Its fair market value on the conversion date is taxed as business income (26(2)(j)).

15. Are amounts received on demolition or disposal of a depreciated asset taxable?
Yes, if full deduction was earlier claimed and it’s not land/goodwill/financial instrument (26(2)(k)).

Here’s a concise conclusion for the FAQs on Section 26 – Income under the head “Profits and gains of business or profession” of the Income Tax Act, 2025:

Section 26 of the Income Tax Act, 2025 provides a comprehensive framework for taxing income arising from any business or profession carried on by the assessee. It not only covers traditional business profits but also includes various other forms of receipts such as compensations, benefits, export incentives, perquisites, and non-compete fees.

Importantly, it distinguishes speculative business as a separate category and excludes residential property income from this head. Taxpayers must carefully assess all types of business-related receipts to ensure proper compliance and reporting under this section.