Understanding PGBP: Profits and Gains of Business or Profession (AY 2026-27)

A complete guide to Sections 28–44DB of the Income Tax Act, 1961 — deductions, disallowances, depreciation, presumptive taxation, and the latest amendments.

What is PGBP?

PGBP — Profits and Gains of Business or Profession — is the third head of income under Section 14 of the Income Tax Act, 1961. It taxes the net profit earned from carrying on any business or profession.

Governed By: Sections 28 to 44DB of the Income Tax Act, 1961

What is ‘Business’? Section 2(13) defines it as any trade, commerce, or manufacture, or any adventure or concern in the nature of trade, commerce, or manufacture.

What is ‘Profession’? Section 2(36) defines it as an occupation requiring intellectual or manual skill — for example, a CA, Doctor, Lawyer, Architect, or Engineer.

Vocation The pursuit of an activity for livelihood is also covered under PGBP — this includes freelancers and artists.

Basis of Charge Income is taxable in the year in which the business or profession is carried on (the previous year).

Section 28 — Incomes Chargeable as PGBP

Section	Head	Description
28(i)	Profits & Gains of Business/Profession	Core income from the primary business or profession activity
28(ii)	Compensation / Damages	Any compensation for termination of agency, office, or managing agency
28(iii)	Income from Partnership	A partner’s salary, bonus, commission, or interest from the firm is taxed here
28(iv)	Value of Benefits/Perquisites	Non-cash benefits arising from business, e.g. stock options, gifts from clients
28(v)	Interest, Salary from Firm	Partner’s income (already covered in 28(iii)); clarifies taxation in the partner’s hands
28(vi)	Export Incentives	Profits on sale of import licences, DEPB, DFRC, Duty Drawback, etc.
28(vii)	Keyman Insurance	Maturity proceeds of a Keyman Insurance Policy

Allowable Deductions — Sections 30 to 37

Sec 30 — Rent, Rates, Taxes, Repairs & Insurance for Building: Covers premises used for business, whether owned or rented.
Sec 31 — Repairs & Insurance of Plant, Machinery & Furniture: Only current repairs qualify, not capital improvements.
Sec 32 — Depreciation: Applies to tangible and intangible assets, using the Block of Assets concept and the Written Down Value (WDV) method.
Sec 33AB — Tea/Coffee/Rubber Development Account: Deposits with NABARD; deduction is the actual deposit or 40% of PGBP, whichever is lower.
Sec 35 — Expenditure on Scientific Research: 100% of revenue expenditure and 100% of capital expenditure (no separate depreciation). In-house R&D gets a weighted deduction.
Sec 36(1)(i) — Insurance Premium: For goods, plant, machinery, and stock used in business.
Sec 36(1)(iii) — Interest on Borrowed Capital: Allowed for business/professional use, but not for personal use or for assets before they’re put to use.
Sec 36(1)(vii) — Bad Debts: Must be written off in the books and previously credited as income; actual irrecoverability is not required.
Sec 37 — General Deduction: Any expenditure that is not capital or personal in nature, laid out wholly and exclusively for business purposes.

Section 32 — Depreciation (Deep Dive)

The WDV (Written Down Value) method is used for all assets.
The Block of Assets concept groups assets of the same class together.
Depreciation is allowed only if the asset is used for business or profession.
Half-year depreciation (50%) applies if an asset is used for less than 180 days in the year.
Additional depreciation of 20% is available on new plant & machinery in the manufacturing/power sector.
Intangible assets (patents, know-how, trademarks) are depreciated at 25% WDV.

Key Depreciation Rates

Asset Category	Rate
Residential Buildings	5%
Non-Residential Buildings	10%
Plant & Machinery (General)	15%
Computers & Software	40%
Furniture & Fittings	10%
Motor Vehicles	15%
Ships	20%
Aircraft	40%

Additional Depreciation [Sec 32(1)(iia)]: An extra 20% is allowed on the cost of new plant & machinery for manufacturing or power generation. If used for less than 180 days, 10% is allowed in the year of purchase, with the balance 10% in the following year. This is not available for offices, transport, retail, or hotels.

Terminal & Unabsorbed Depreciation: If the value of a block becomes nil or negative, it results in a short-term capital gain or loss. Unlike business losses, unabsorbed depreciation can be carried forward indefinitely.

Disallowances — What Cannot Be Deducted

Section 40(a): Interest, salary, or royalty paid to a non-resident without deducting TDS is fully disallowed. Payment to a resident without TDS results in 30% being disallowed. The disallowed amount becomes allowable in the year TDS is deducted and remitted.

Section 40(b) — Partnership Firms: Interest to partners is capped at 12% p.a. (simple interest). Salary to working partners follows a slab based on profit — 90% or ₹1,50,000 (whichever is higher) on the first ₹3 lakh of net profit, and 60% on profit above that.

Section 40A(2) — Related Party Payments: The Assessing Officer can disallow the excess of any payment to specified relatives, directors, or associated concerns over fair market value.

Section 40A(3) — Cash Payment Rule: Any cash payment exceeding ₹10,000 per person per day is 100% disallowed (₹35,000 for payments to transporters). Exceptions exist for remote areas and payments to the RBI.

Section 43B — Actual Payment Basis: Employer contributions to PF, ESI, and gratuity are allowed only on actual payment. The same applies to taxes, duties, cess, and interest on loans from banks/FIs. Sec 43B(h) [w.e.f. AY 2024-25]: MSME payments must be made within the agreed credit period, or within 45 days (15 days if there’s no agreement). Amounts unpaid by year-end are disallowed, and become allowable only in the year of actual payment.

Presumptive Taxation — Sections 44AD, 44ADA, 44AE

Section 44AD — Small Business

Presumptive Rate: 8% of turnover (6% for digital receipts)
Eligibility: Resident individual/HUF/Firm (not LLP); turnover up to ₹3 crore if 95%+ receipts are digital, otherwise up to ₹2 crore
Key Points: No books of accounts or audit required; advance tax payable in one installment by 15 March; if opted out, can’t re-opt for 5 years
Not applicable to: LLPs, companies, professionals

Section 44ADA — Specified Professionals

Presumptive Rate: 50% of gross receipts
Eligibility: Resident individual/Partnership (not LLP); gross receipts up to ₹75 lakh if 95%+ digital, otherwise up to ₹50 lakh
Key Points: Covers Legal, Medical, Engineering, Architecture, CA, CS, and Technical Consultancy; no separate expense deductions; audit not required within limits
Not applicable to: LLPs, companies, non-specified professions

Section 44AE — Goods Carriage

Presumptive Rate: ₹1,000 per ton per month for heavy goods vehicles; ₹7,500 per vehicle per month for others
Eligibility: Any person owning up to 10 goods vehicles at any time during the year
Key Points: Higher actual income can be declared if applicable; all deductions and depreciation (at WDV rates) are deemed to have been given
Not applicable to: Persons owning more than 10 vehicles at any time

Key Takeaways

PGBP covers all income from business/profession — Section 28 defines the scope exhaustively.
Deductions under Sections 30–37 reduce taxable income, but only genuine expenses incurred wholly and exclusively for business qualify.
Depreciation (Sec 32) follows the WDV method on the “Block of Assets” concept — and is mandatory, not optional.
Key disallowances include cash payments over ₹10,000 (Sec 40A(3)), late deposit of PF/taxes (Sec 43B), and TDS defaults (Sec 40(a)).
Presumptive taxation (Sections 44AD, 44ADA, 44AE) simplifies compliance for small businesses and professionals.
Business losses can be carried forward for 8 years; unabsorbed depreciation can be carried forward indefinitely.
Tax audit under Section 44AB is mandatory beyond turnover thresholds — non-compliance attracts a 0.5% penalty.
Landmark judgements continue to shape interpretation — always verify against the latest CBDT circulars and judicial precedents.

AY 2026-27 — Key Amendments & Updates (Finance Acts 2023–2025)

Sec 43B(h) — MSME Payments [w.e.f. AY 2024-25] Payments to Micro & Small Enterprises must be made within the MSMED Act timeline — 15 days without a written agreement, or 45 days with one. Unpaid MSME dues at year-end are 100% disallowed, and become allowable only in the year of actual payment. This applies only to Micro & Small enterprises, not Medium ones.

New Tax Regime — Default [w.e.f. AY 2024-25] Section 115BAC is now the default regime for individuals and HUFs; taxpayers must actively opt out to use the Old Regime. Under the New Regime, deductions under Sections 35, 35D, 80-IC, 80-IB, and 10AA are not available, though depreciation under Section 32 and standard PGBP deductions under Sections 30–37 continue to be allowed.

Depreciation Updates [AY 2026-27] Goodwill is confirmed as not a depreciable intangible asset — no depreciation is allowed on purchased goodwill. Solar energy equipment and electric vehicles used in business are depreciated at 40% WDV. Computer software continues at 40% WDV, while mobile phones used for business form part of the P&M block at 15%.

Other Key Amendments & CBDT Clarifications Virtual Digital Assets (VDAs/crypto) held as business stock-in-trade are taxed under PGBP; otherwise, they attract a flat 30% VDA tax. Deductions under Sections 80-IC/80-IB are being phased out for new units, though existing eligible units may continue to claim them.