Section 28 of income Tax Act with example
Section 28 of the Income Tax Act governs the taxation of profits and gains derived from business or professional activities. It includes income from regular business operations, compensation for contract termination, non-compete fees, export incentives, duty drawbacks, and benefits or perquisites received in kind or cash. It also covers income from converting inventory into capital assets, Keyman insurance proceeds, and speculative transactions. From FY 2025-26, rental income from residential properties is excluded from this section and taxed under "Income from House Property." Understanding Section 28 is crucial for accurate tax compliance and efficient financial planning. The article will explain the deep drive of "Section 28 of income Tax Act with example."
Section 28: Profits and Gains of Business or Profession
The following incomes are
chargeable to income tax under the head "Profits and Gains of Business or
Profession". Each section includes detailed provisions, subsections, and
practical illustrations to make the concepts easier to understand.
Section 28(i): Profits from Business or Profession
The profits and gains from any
business or profession carried out by the taxpayer at any time during the
previous year are taxable.
Illustration:
Mr. A operates a retail store and
earns a profit of ₹2,00,000 during the financial year. This profit is taxable
under this section.
Section 28(ii): Compensation or Other Payments
Income includes any compensation
or payment due to or received by:
Subsection (a): A person managing the
whole or substantial part of the affairs of an Indian company, related to:
Termination of
their management role.
Modification
of the terms and conditions of their management.
Illustration:
A managing director receives ₹50
lakh as compensation for terminating his role. This amount is taxable under
this section.
Subsection (b): A person managing the
whole or substantial part of the affairs in India of any other company, related
to:
Termination of
their office.
Modification
of the terms and conditions of their office.
Illustration:
An employee managing a foreign
company's Indian operations receives ₹30 lakh as compensation for office
termination. This amount is taxable.
Subsection (c): A person holding an
agency in India for a part of the business of another, related to:
Termination of
the agency.
Modification
of the terms and conditions of the agency.
Illustration:
An agent receives ₹10 lakh for
termination of their contract with a company. This compensation is taxable.
Subsection (d): A person in connection
with the vesting of property or business management in the Government or a
government-controlled corporation under the law.
Illustration:
A factory is taken over by the
government, and the owner receives compensation of ₹80 lakh. This compensation
is taxable under this section.
Subsection
(e): A person in connection with the termination or modification of the terms
of any business-related contract.
Illustration:
A contractor receives ₹20 lakh
for the cancellation of a supply agreement. This amount is taxable.
Section 28(iii): Income from Specific Services
Income earned by trade,
professional, or similar associations for providing specific services to their
members.
Illustration:
A professional association
collects ₹10 lakh from members for providing training services. This amount is
taxable.
Section 28(iiia): Profits on Sale of Licenses
Profits from selling licenses
granted under the Imports (Control) Order, 1955, made under the Imports and
Exports (Control) Act, 1947.
Illustration:
A trader sells an import license
for ₹5 lakh profit. This profit is taxable under this section.
Section 28(iiib): Cash Assistance
Any cash assistance (by whatever
name called) received or receivable against exports under a government scheme.
Illustration:
An exporter receives ₹2 lakh as
cash assistance under a government export scheme. This amount is taxable.
Section 28(iiic): Customs or Excise Duty Drawback
Customs or excise duty repaid or
repayable as a drawback against exports under the Customs and Central Excise
Duties Drawback Rules, 1971.
Illustration:
An exporter receives ₹1.5 lakh as
a duty drawback for exported goods. This amount is taxable.
Section 28(iii): Profits on Transfer of Export Entitlements
Subsection (a): Profits from
transferring the Duty Entitlement Pass Book Scheme under the export-import
policy formulated under the Foreign Trade (Development and Regulation) Act,
1992.
Subsection
(b): Profits from transferring the Duty Free Replenishment Certificate under
the same policy.
Illustration:
A trader earns ₹6 lakh profit
from selling export entitlements under these schemes. This profit is taxable.
Section 28(iv): Value of Benefits or Perquisites
The value of any benefit or
perquisite arising from business or professional activity, whether:
Convertible
into money or not.
In cash, kind,
or a mix of both.
Illustration:
A supplier receives a car worth
₹8 lakh as a benefit for achieving sales targets. The value of the car is
taxable.
Section 28(v): Income of Partners
Any interest, salary, bonus,
commission, or remuneration due to or received by a partner from the firm.
However, if such income is not allowed as a deduction under Section 40(b), it
will be adjusted accordingly.
Illustration:
A partner receives ₹4 lakh as
salary from the firm. This amount is taxable under this section.
Section 28(va): Payments for Non-Compete or Sharing Agreements
Income includes sums received
under agreements for:
Subsection (a): Not engaging in any
business or profession.
Subsection (b): Not sharing know-how,
patents, copyrights, trademarks, licenses, franchises, or other
business/commercial rights or techniques useful for manufacturing or providing
services.
Exceptions:
Amounts received for transferring
the right to manufacture, produce, or process goods or to carry on
business/profession are taxed under "Capital Gains."
Compensation from the Montreal
Protocol multilateral fund for ozone layer protection as per an agreement with
the Government of India is excluded.
Illustration:
A businessman receives ₹5 lakh
for not starting a competing business. This amount is taxable.
Section 28(vi): Keyman Insurance Policy
Any sum received under a Keyman
insurance policy, including bonuses on the policy.
Illustration:
A company receives ₹50 lakh under
a Keyman insurance policy on the demise of a key employee. This amount is
taxable.
Section 28(via): Conversion of Inventory into Capital Asset
The fair market value of
inventory on the date it is converted into or treated as a capital asset,
determined in the prescribed manner.
Illustration:
A builder converts unsold flats
(inventory) worth ₹1 crore into investment property. The fair market value of
₹1 crore is taxable.
Section 28(vii): Income from Capital Assets
Any sum received on account of
demolition, destruction, discarding, or transfer of a capital asset (excluding
land, goodwill, or financial instruments), if the entire expenditure on such an
asset was claimed as a deduction under Section 35AD.
Illustration:
A machinery is sold for ₹10 lakh
after claiming depreciation under Section 35AD. The sale proceeds are taxable.
Section 28(Explanation 2): Speculative Transactions
Speculative transactions that
qualify as a business are considered distinct and separate from any other
business.
Illustration:
Mr. B engages in speculative
share trading and earns ₹2 lakh. This income is treated separately and is
taxable under this section.
Section 28(Explanation 3): Rental Income from Residential Property
From the financial year 2025-26
onwards, income from letting out a residential house or part of it by the owner
is not taxable under this head. Instead, it is taxable under "Income from
House Property."
Illustration:
A
house owner earns ₹6 lakh annually by renting out their residential property.
This income is taxed under "Income from House Property" and not under
"Profits and Gains of Business or Profession."
Clarification: Letting
residential property is not considered a business activity.
Frequently Asked Questions (FAQs)
What is Section 28 of the Income Tax Act?
Section 28 outlines the types of
incomes taxable under "Profits and Gains of Business or Profession."
What are "profits and gains"?
These refer to the financial
benefits or earnings derived from business or professional activities.
Are compensation payments taxable under Section 28?
Yes, compensation related to
termination, modification of contracts, or government acquisitions is taxable.
Is income from selling export licenses taxable?
Yes, profits from selling export
licenses are taxable under Section 28.
What is considered a benefit or perquisite under Section 28(iv)?
Any benefit arising from business or
professional activities, whether in cash or kind, is taxable.
Is income from speculative transactions treated separately?
Yes, speculative transactions are
treated as a distinct business under Section 28(Explanation 2).
What is the tax treatment for Keyman Insurance policy proceeds?
Proceeds, including bonuses
received under a Keyman insurance policy, are taxable under Section 28(vi).
Is income from renting a residential property treated as business income?
No, as clarified from FY 2025-26,
rental income from residential property is taxable under "Income from
House Property."
Are duty drawbacks on exports taxable?
Yes, customs or excise duty
drawbacks received against exports are taxable under Section 28(iiic).
What is the tax implication of converting inventory into capital assets?
The fair market value of the
inventory on the conversion date is taxable as business income under Section
28(via).
Are non-compete fees taxable under this section?
Yes, any sum received under an
agreement to not compete or share intellectual property is taxable under
Section 28(10).
Are partnership earnings taxable under Section 28?
Yes, any salary, interest, bonus,
or commission received by a partner is taxable under Section 28(v), subject to
adjustments.
What is the treatment of profits from transferring export entitlements?
Profits from transferring export
entitlements like Duty Entitlement Pass Book are taxable under Section 28(iii).
Are payments received for agency termination taxable?
Yes, compensation received for
agency termination or modification is taxable under Section 28(ii)(c).
What is the tax treatment of speculative business income?
Speculative transactions are
treated as a separate business and are taxable under Section 28(Explanation 2).
Are proceeds from the sale of damaged or discarded assets taxable?
Yes, proceeds from selling such
assets, if deductions were claimed under Section 35AD, are taxable under
Section 28(vii).
What are examples of cash assistance taxable under Section 28?
Government schemes providing
financial support for exports, like ₹2 lakh received as export assistance, fall
under this category.
Is income from professional associations taxable?
Yes, income earned by
associations from providing services to their members is taxable under Section
28(iii).
Are payments for contract termination taxable under Section 28?
Yes, payments received for contract termination or modification of terms are taxable under Section 28(ii)(e).