Section 26 of Income Tax Act 2025 – Income from Business and Profession – Easy Guide

Last Updated onAugust 26, 2026 12:28 pm

Section 26 of Income Tax Act 2025 – The income from business and profession or more precisely the income under the head ‘Profits and gains of business or profession’ is covered under section 26 of the Income Tax Act, 2025 replacing the erstwhile section 28 of the Income Tax Act, 1961. Both the sections i.e. the erstwhile Section 28 and the new Section 26 are similar in spirit as the charging section for the income from business and profession with some minor differences that we will explore here in detail.

Section 26 of Income Tax Act 2025 – Income from Business and Profession

Section 26 of the Income Tax Act, 2025 is the charging section for income under the head ‘Profits and gains of business or profession’. This essentially means that the incomes included in this section will be chargeable to tax under the head ‘Profits and gains of business or profession’ and not taxed in any other head of income. There will be no exceptions while computing income from business and profession for the incomes included in this section unless mentioned otherwise.

Income from Business and Profession u/s 26

Under Section 26 of the Income Tax Act, 2025, the following incomes will be chargeable to tax under the head ‘Profits and gains of business or profession’ –

• Profits and gains from any business or profession carried out by the assessee at any time during the tax year. It is pertinent to note here that the term profits and gains also include any losses from business and profession.
• Any compensation or any such payment by whatever name called due or received by any person in connection with termination of management or contract or modification of terms and conditions with either an Indian company or a foreign company operating in India or ay agency in India or any other contract related to the business.
• Any compensation or any such payment by whatever name called due or received by any person for vesting of the management of any property or business in any any corporation owned or controlled by the Government i.e. where the Government vests the management of its corporation with a private entity.
• Any income derived by a trade, professional or similar association from specified services performed for its members.
• In case of assessees in the export business, the profits on sale of import license (that was provided for facilitation of export business), cash assistance against exports, duty drawback or duty remission or any other export incentive, received or receivable. Therefore, it is expressly clarified here that any such profits will not be taxed under the head ‘Income from Capital Gains’ since they are being taxed here under the head ‘Profits and gains of business or profession’.
• The value of any benefit or perquisite arising from business or the exercise of a profession, whether convertible into money or not or in cash or in kind or partly in cash and kind.
• Any sum received under the Keyman Insurance Policy including the sum allocated by way of bonus on such policy. Therefore, if a company receives the proceeds, it will be taxed under the head income from business and profession while if the employee receives the proceeds it will be treated as income from salary.

Income of a Partner from a firm

Any interest, salary, bonus, commission or any remuneration, by whatever name called, due to or received by a partner of a firm will be taxed under income from business and profession. However, the deduction for this expense will be allowed to the extent as per Section 35(e) of the Income Tax Act, 2025.

Therefore, it has been made clear that salary income of a partner from a firm will not be taxed under the head ‘Income from Salaries’ since it is being covered here under income from business and profession. Moreover, the interest income of a partner from a firm will not be taxed under the head ‘Income from other sources’ since it is being covered here under income from business and profession.

Section 26(2)(h) of Income Tax Act 2025 – Income for not carrying out any activity

As per Section 26(2)(h) of Income Tax Act 2025, any sum received or receivable, either in cash or in kind, under any agreement for not carrying out any activity in relation to any business or profession, except

• On account of transfer of right to manufacture, produce or process any article or thing or the right to carry on business or profession that is already chargeable under the head ‘Income from Capital Gains’, or
• 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 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 technique likely to assist in the manufacture or processing of goods or provision for service.

Stock in trade converted into Capital asset

Where any stock-in-trade is converted by the assessee into a capital asset, the fair market value of the stock as on the date of such conversion will be chargeable to tax under the head income from business and profession. Therefore, this conversion will not be taxed under the head ‘Income from Capital Gains’.

Capital Expenditure of Specified Business

As per Section 26(k), any sum due or received in cash or kind when a capital asset other than land or goodwill or any financial instrument, is demolished, destroyed, discarded or transferred and the whole of the expenditure has already been allowed as deduction u/s 46 of the Income Tax Act, 2025 or the erstwhile section 35AD of the Income Tax Act, 1961 will be chargeable to tax under the head income from business and profession.

Income from Speculation Business

Any business or transactions carried out by an assessee that are speculative in nature, will be deemed to be distinct and separate from any other business.

Income from Residential House Property

As per Section 26(4) of the Income Tax Act, 2025, it has been clarified that any income from letting out of a residential house property, or a part of it by the owner will not be covered under the head income from business and profession. Therefore, the rental income from any residential house property will be taxed under the head ‘Income from House Property’ only.

Difference between the old and the new law

Section 26 of the new Income Tax Act, 2025 is very similar to the erstwhile Section 28 of the Income Tax Act, 1961 except for the following three differences –

• Section 26 of the new Income Tax Act, 2025 follows the concept of ‘tax year’ replacing the earlier concept of ‘previous year’ and ‘assessment year’ used in Section 28 of the Income Tax Act, 1961.
• The terminology has been simplified in the new law.
• Since the Income Tax Act, 1961 had been in force for over 6 decades, several amendments had been incorporated u/s 28 of the old law. However, the new Income Tax Act, 2025 incorporates all these amendments in a simplified and concise manner u/s 26.

FAQs

Q1. What is Section 26(2)(h) of Income Tax Act 2025?

A1. Section 26(2)(h) of Income Tax Act 2025 primarily covers any sum received or receivable in cash or kind under restrictive agreements such as non-compete agreements and non-disclosure/sharing agreements.

About the Author This article is written by FCA Eshita Krishna , an experienced Chartered Accountant with advanced ICAI certifications in DISA, Anti-Money Laundering, Real Estate Laws, and Forex & Treasury Management. With strong expertise in direct and indirect tax, audit, risk advisory, financial planning, and financial management, she delivers accurate, experience-backed financial insights to readers.