Business Income and Allowable Deductions under the Income Tax Act 2025: Sections 26, 28 and 34

Under the Income-tax Act, 2025, profits of a business or profession are taxed under the head "Profits and gains of business or profession". Section 26 lists what falls in this head, section 27 sends you to sections 28 to 60 for the computation, section 28 allows rent, rates, taxes, repairs and insurance on business premises and machinery, and section 34 allows any other expense that is wholly and exclusively for the business, with a short list of expenses that never qualify. It applies to every proprietor, firm, company and professional. Figures and examples below use tax year 2026-27, with the Act as amended by the Finance Act, 2026.

What income is taxed as business or professional income?

Section 26(1) charges the incomes in section 26(2) under this head. The first item is the obvious one: profits and gains of any business or profession carried on at any time during the tax year (section 26(2)(a)). The rest of the list catches receipts that people often treat as "one-off" or "other income":

Section 26(2)	What is included
(b)	Compensation received for termination of, or a change in terms of, the management of a company, an agency in India, or a business contract
(c)	Compensation for vesting the management of a property or business in the Government or a Government-owned or controlled corporation
(d)	Income of a trade, professional or similar association from specific services to its members
(e)	Profit on sale of an import licence, cash assistance against export, duty drawback, duty remission or other export incentive, received or receivable
(f)	Value of any benefit or perquisite from business or profession, in cash or in kind, convertible into money or not
(g)	Interest, salary, bonus, commission or remuneration received by a partner from the firm, to the extent allowed to the firm as a deduction under section 35(e)
(h)	Sum received for agreeing not to carry on an activity of a business or profession, or not to share know-how, patent, copyright, trade-mark, licence, franchise or similar rights (with two exclusions in (h)(i)(A) and (B))
(i)	Sum received under a Keyman insurance policy, including bonus allocated on it
(j)	Fair market value of inventory on the date it is converted into, or treated as, a capital asset, determined as prescribed
(k)	Sum received on demolition, destruction, discarding or transfer of a capital asset (other than land, goodwill or a financial instrument) whose whole cost was allowed as a deduction under section 35AD of the 1961 Act or section 46 of this Act

Two further rules sit at the end of the section. Under section 26(3), speculative transactions that amount to a business are treated as a separate speculation business, distinct from any other business. Under section 26(4), rent a house owner earns from letting out a residential house, or part of it, is not business income. It is taxed only under "Income from house property".

How is business income computed?

Section 27 says business income "shall be computed as per the provisions of sections 28 to 60, except section 58". Section 58 is the special presumptive-basis provision for certain residents, so it is a separate route. For everyone else, the deduction sections are:

• Sections 28 to 33: rent and repairs (28), employee welfare (29), certain premium (30), bad debt (31), other deductions (32) and depreciation (33).
• Section 34: the general rule for any other business expense.
• Section 35: amounts not deductible in certain circumstances.
• Sections 44 to 49, 51 and 52: amortisation and special-purpose expenditure, for example preliminary expenses (44) and scientific research (45).

Presumptive route (section 58). An eligible assessee is a resident individual, HUF or firm (other than an LLP) that has not claimed any Chapter VIII-C deduction, does not carry on a specified profession and earns no commission, brokerage or agency income (section 58(11)(a)). For a business other than goods carriage, with turnover up to Rs 2 crore (Rs 3 crore if cash receipts are at most 5%), profit is deemed to be the higher of the actual profit and the total of 6% of receipts through specified banking or online mode and 8% of the rest (section 58(2), Table serial 1). In that case no separate deduction under this article is allowed against the presumed income (section 58(4)). If you claim a lower profit and your total income exceeds the maximum amount not chargeable to tax, books and audit apply (section 58(3)).

This article covers sections 26, 27, 28 and 34. Depreciation, bad debts and the disallowances in section 35 each have their own conditions and are not covered here.

Which rent, repairs and insurance can a business deduct? (section 28)

Section 28(1) allows these amounts for premises, machinery, plant or furniture used for the business or profession:

Clause	Deduction	Condition
28(1)(a)	Insurance premium against damage or destruction	For premises, machinery, plant or furniture
28(1)(b)	Land revenue, local rates, municipal taxes paid	Paid for the premises
28(1)(c)	Rent paid	You occupy the premises as a tenant
28(1)(d)	Current repairs to premises	Not capital in nature; you occupy otherwise than as a tenant (for example, you own them)
28(1)(e)	Cost of repairs to premises	Not capital in nature; you are a tenant and have undertaken to bear the repair cost
28(1)(f)	Current repairs to machinery, plant or furniture	Not capital in nature

Mixed use. Under section 28(2), if the premises, building, machinery, plant or furniture is only partly used, or not wholly and exclusively used, for the business, the deduction is limited to a fair proportionate part. The Assessing Officer determines it, having regard to how much it is used for the business.

What is the general rule for any other business expense? (section 34)

Section 34(1) allows any expenditure that is laid out or expended wholly and exclusively for the business or profession. Three things take an expense outside this general rule:

• It is of the kind already dealt with in sections 28 to 33, 44 to 49, 51 and 52. Those sections then decide the deduction.
• It is capital expenditure.
• It is a personal expense of the assessee.

Which business expenses are never allowed under section 34?

Section 34(2) says an expense laid out wholly and exclusively for the business does not include:

1. Expenditure for any purpose that is an offence or is prohibited by law (section 34(2)(a)).
2. Expenditure on corporate social responsibility activities referred to in section 135 of the Companies Act, 2013 (section 34(2)(b)).
3. Expenditure on advertisement in a souvenir, brochure, tract, pamphlet or the like published by a political party (section 34(2)(c)).

Section 34(3) spells out what "offence or prohibited by law" includes:

• Any purpose that is an offence under, or prohibited by, any law in force in or outside India.
• A benefit or perquisite given to a person, whether or not that person is in business, when accepting it breaks a law, rule, regulation or guideline governing that person's conduct.
• Compounding an offence under any law in force in or outside India.
• Settling proceedings started for a contravention under a law notified by the Central Government.

Worked example 1: partly-used premises (tax year 2026-27)

Meena is a consultant. She works from a rented flat and uses part of it for her practice. Assumptions: rent Rs 40,000 a month, annual insurance on the contents Rs 12,000, municipal tax Rs 20,000, and the business-use share fixed at 60% after considering how the flat is used (the actual share is for the Assessing Officer to determine under section 28(2)).

Item	Total paid (Rs)	Working	Allowed (Rs)
Rent, section 28(1)(c)	4,80,000	40,000 x 12 = 4,80,000; 60% of it	2,88,000
Insurance, section 28(1)(a)	12,000	60% of 12,000	7,200
Municipal tax, section 28(1)(b)	20,000	60% of 20,000	12,000
Total	5,12,000	60% of 5,12,000	3,07,200

The remaining Rs 2,04,800 is the personal share and is not deducted.

Worked example 2: from book profit to business income (tax year 2026-27)

Ravi runs a trading business. His books show a profit of Rs 8,00,000 after charging every expense. To keep the focus on section 34, assume there are no other adjustments (no depreciation difference, no other disallowance).

Expense already charged in the books	Amount (Rs)	Treatment
Shop rent (he is the tenant)	3,00,000	Allowed, section 28(1)(c); no add-back
Current repairs to the shop he owns for storage	60,000	Allowed, section 28(1)(d) if not capital in nature; no add-back
CSR spend	1,50,000	Not allowed, section 34(2)(b); add back
Amount paid to compound an offence	40,000	Not allowed, sections 34(2)(a) and 34(3)(c); add back
Advertisement in a political party's souvenir	25,000	Not allowed, section 34(2)(c); add back

1. Profit per books: Rs 8,00,000
2. Add back CSR, compounding fee and political-party advertisement: 1,50,000 + 40,000 + 25,000 = Rs 2,15,000
3. Business income: 8,00,000 + 2,15,000 = Rs 10,15,000

Example 3: a partner's remuneration (section 26(2)(g))

Anil is a partner in a firm. For tax year 2026-27 the firm pays him salary and interest of Rs 6,00,000, of which Rs 4,50,000 is allowed as a deduction to the firm under section 35(e) (assumed figure; the section 35(e) limits are outside this article). Anil's business income includes Rs 4,50,000, the part allowed to the firm. The other Rs 1,50,000 is not allowed to the firm, and section 26(2)(g) does not tax it in Anil's hands under this head.

What other business deductions does the Act allow, and which are disallowed? (sections 29 to 32 and 35)

Section 34 is the catch-all. Several common expenses have their own sections with their own conditions:

Expense	Provision	Key condition
Employer contribution to recognised provident fund, approved superannuation or gratuity fund	Section 29(1)(a), (c)	Fund must be recognised or approved; section 29(3) bars other employer contributions to funds and trusts unless a law requires them
Premium on insurance of stocks or stores	Section 30(a)	Insurance against damage or destruction; health insurance for employees under section 30(c) must not be paid in cash
Bad debt written off	Section 31(2)	Already taken into income, or money lent in a banking or money-lending business; a mere provision is not a bad debt (section 31(3)(a))
Bonus or commission to an employee	Section 32(a)	Allowed only if the amount would not have been payable to the employee as profits or dividend
Interest on borrowed capital	Section 32(b)	Capital borrowed for the business; interest on money borrowed to acquire an asset is excluded from the date of borrowing until the asset is first put to use

Disallowances in section 35. Irrespective of the other deduction sections, some amounts are not deductible. Three come up in almost every file:

• Tax on income, including surcharge and cess on it (section 35(a)).
• 30% of a sum payable to a resident on which tax had to be deducted at source, if the tax was not deducted, or was deducted but not paid by the due date in section 263(1) (section 35(b)(i)). If the tax is paid later, that 30% is allowed in the tax year of payment (section 35(b)(i)(A)). For payments outside India or to non-residents, the whole sum is disallowed on the same default (section 35(b)(ii)).
• Partner payments by a firm beyond the limits in section 35(e): interest above 12% simple interest a year, and remuneration to working partners above Rs 3,00,000 or 90% of book profit on the first Rs 6,00,000 (whichever is higher) plus 60% of the balance. Remuneration to a non-working partner, or anything not authorised by the partnership deed, is disallowed entirely.

Example (tax year 2026-27). Ravi pays a resident contractor Rs 1,00,000 and charges it in his books. Tax was deductible at source but he never deducted it. Under section 35(b)(i), 30% of Rs 1,00,000 = Rs 30,000 is added back to his business income. The remaining Rs 70,000 stays allowed. If he later deducts and pays the tax, Rs 30,000 is allowed in the year of that payment.

The related conditions are covered in our guides on employee welfare deductions, bad debt, payments allowed only on actual payment and firms and partners' remuneration.

Real-life situations: is it business income?

• Sunita and the agency. Sunita holds an agency in India for a manufacturer. The manufacturer ends the agency and pays her Rs 5,00,000 as compensation. Under section 26(2)(b)(ii) this is business income, even though she will not earn from the agency again.
• Karan and the non-compete. Karan sells his coaching franchise and is paid Rs 3,00,000 to stay out of the same activity. A sum for agreeing not to carry on an activity is business income under section 26(2)(h)(i), unless it is a transfer of the right to carry on the business, which is taxed as capital gains (section 26(2)(h)(i)(A)).
• Rekha and the flat. Rekha owns a residential house and lets it out. Even if she lets it regularly, section 26(4) keeps the rent out of business income. It is taxed as income from house property.
• Imran and the tenant's repairs. Imran rents a godown and the lease says he bears repair costs. Current repairs that are not capital in nature are allowed under section 28(1)(e). If he builds a new mezzanine floor, that is capital expenditure and section 34(1) does not allow it.

What is the safe harbour in rule 100?

Rule 100 of the Income-tax Rules, 2026 gives a safe harbour for two eligible businesses. Where an eligible assessee has exercised the option under rule 101 and it is not declared invalid, the tax authorities accept income declared at or above these levels:

Eligible business	Profit to be declared (rule 100(2))
Selling of raw diamonds	4% or more of gross receipts
Storage of components in a warehouse in a custom bonded area for sale to a contract manufacturer	2% or more of gross receipts

Once the option is exercised, rule 100(3) treats deductions under sections 28 to 34, 44 to 49, 51, 52 and Schedules IX and X as already given. No further deduction is allowed, set-off of unabsorbed depreciation and carried-forward losses is barred, and set-off of loss from other business or other heads against this business income is barred. The procedure for exercising the option is in rule 101, which this article does not cover.

Common mistakes

1. Claiming 100% of rent or insurance for a mixed-use premises. Section 28(2) limits the claim to a fair proportionate part.
2. Claiming capital spending as repairs. Sections 28(1)(d), (e) and (f) cover only repairs that are not capital in nature.
3. Deducting CSR spend. Section 34(2)(b) excludes it from business expenditure, even if the company sees it as a cost of doing business.
4. Deducting a compounding fee or a penalty for breaking a law. Section 34(3) brings compounding and settlement payments under the disallowance.
5. Treating compensation or a non-compete sum as a capital receipt. Section 26(2)(b) and (h) bring these into business income unless the (h)(i)(A) exception applies.
6. Putting house rent in the business head. Section 26(4) sends residential house letting to house property.

Quick reference

Question	Provision
Which incomes are business income?	Section 26(2)(a) to (k)
Is speculation separate from other business?	Yes, section 26(3)
Where is business income computed?	Sections 28 to 60, except 58 (section 27)
Rent, rates, taxes, repairs, insurance	Section 28(1); mixed use, section 28(2)
General business expense	Section 34(1)
Never allowed under 34(1)	Offences, CSR, political-party souvenir ads (section 34(2) and (3))
Safe harbour	Rule 100, option under rule 101

Where this is in the Act

• Section 26: income under the head "Profits and gains of business or profession"
• Section 27: manner of computing it
• Section 28: rent, rates, taxes, repairs and insurance
• Section 34: general conditions for allowable deductions
• Sections 29 to 32: employee welfare, premium, bad debt and other deductions; section 35: amounts not deductible
• Rule 100: safe harbour for income attribution; rule 101: option for safe harbour

For where business income sits among the other heads, see our guide to the scope of total income under the 2025 Act. If the rent you pay is subject to tax deduction, see TDS on rent under the Income-tax Act, 2025.

For a CA firm, the hard part is collecting the facts for each client: the business-use share of premises, whether repairs were capital, and which book entries are CSR or compounding fees. Finexo's practice management software helps you track the documents and queries you need from each client before filing. It does not decide deductions for you.

This article is general information on the law as amended by the Finance Act, 2026. It is not tax advice. Check the Act and Rules for your facts.