What are Business Profits?

Business profits refer to profits or gains made from any manufacturing or trading activity. For income tax purposes, such income is known as 'Profits and Gains of Business and Profession.'

Business Profits in Detail

Let's look at some items that qualify as profits and gains of business and profession.

Profits and gains of business: Pretty straightforward, this refers to any profit you've made either through trading or manufacturing of goods.

If you are a partner in a partnership firm, any income you earn from a partnership firm should be counted as business profit. This income can be salary, bonus, interest or any other income.

Speculative income is income earned through speculative activities. One example of speculative income is intra-day trading in equities and commodities where you are not purchasing or taking the delivery the goods, but making gains simply through price fluctuations.

Key man insurance is taken by a company to insure itself against the death of a key staff like CEO, CFO, etc. If such a person dies, and the company receives a sum under key man insurance, this income will be considered as business profits.

Business profits also include any export incentives received by a business. For example, recently the government gave an incentive of ₹3,300 to sugar exporters to clear out growing stocks of sugar.

Calculation of Business Profits

Business profits are calculated by deducted the following from income.

  • Business expenses including all expenses incurred to run a business. Examples of expenses include salaries, raw material costs, logistics, etc.
  • Any tax benefits and allowances available under the Income tax act (sections 30 to 43D). For example, businesses get a tax benefit for any scientific research-related expenses. Another example is a deduction of interest paid on any capital borrowed for the business./li>

Note you cannot deduct the following from your business income.

  • Any expenses incurred before setting up the business
  • Any expenses incurred on a discontinued business or a business that's not operational anymore

Use our tax calculator to understand how business profits affect your tax payable.

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