Chapter IV - Computation of Total Income
Section 26
Section 26: income under head "profits and gains of business or profession"
Section 26 is the charging section for the "Profits and gains of business or profession" head (often shortened to "PGBP"). Beyond the general profits of a business or profession, it specifically lists a range of receipts that are also taxed under this head - from management/agency compensation to export incentives and non-compete payments.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) The incomes referred to in sub-section (2) shall be chargeable to income-tax under the head “Profits and gains of business or profession”.
(2) The income under sub-section (1) shall include–– (a) the profits and gains of any business or profession carried on by the assessee at any time during the tax year; (b) any compensation or other payment, due to, or received, by any person by whatever name called,–– (i) wholly or substantially managing the affairs— (A) of an Indian company; or (B) in India, of any other company; or (ii) holding any agency in India for any part of business activities of any other person; or (iii) for any contract relating to business, in connection with termination of management, office, agency or contract, as the case may be, or modification of terms and conditions relating thereto; (c) any compensation or payment, due to, or received by, any person for vesting of the management of any property or business, in the Government including any corporation owned or controlled by the Government under any law in force; (d) income derived by a trade, professional or similar association from specific services performed for its members; (e) profits on sale of import licence, cash assistance against export, duty drawback or duty remission or any other export incentive, received or receivable; (f) the value of any benefit or perquisite arising from business or the exercise of a profession, whether— (i) convertible into money or not; or (ii) in cash or in kind or partly in cash and partly in kind; (g) any interest, salary, bonus, commission or remuneration, by whatever name called, which is due to, or received by, a partner of a firm from such firm to the extent allowed under section 35(e) as a deduction in computing the income of the firm; (h) any sum, received or receivable, in cash or in kind–– (i) under an agreement for not carrying out any activity in relation to any business or profession, not being— (A) any sum received on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession which is chargeable under the head “Capital gains”; (B) 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 (ii) 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 services; (i) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy; (j) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the manner, as may be prescribed; and (k) any sum which is received or receivable in cash or kind, when–– (i) a capital asset other than land or goodwill or financial instrument, is demolished, destroyed, discarded or transferred; and (ii) the whole of the expenditure on it has been allowed as a deduction under section 35AD of the Income-tax Act, 1961 or section 46 of this Act.
(3) Where speculative transactions carried on by an assessee are of such nature to constitute a business, the business (herein referred to as speculation business) shall be deemed to be distinct and separate from any other business.
(4) Any income from letting out of a residential house or a part of it by the owner shall not be included in income under sub-section (1) and shall be chargeable only under the head “Income from house property”.
Introduction
Section 26 defines the scope of the business and professional income head. It includes operating profit and a range of specifically listed receipts, while treating speculation separately and excluding an owner's residential letting.
Key takeaways
Business-income head
Section 26 charges profits and gains from business or profession carried on during the tax year and several listed business-connected receipts.
Residential letting is separate
Income from letting a residential house by its owner is excluded from this head and charged under house property.
Speculation business
Where speculative transactions constitute a business, that business is deemed distinct from the taxpayer's other businesses.
What is chargeable under this head
Section 26(2) includes, among other items:
- Profits and gains of any business or profession carried on by the assessee at any time during the tax year
- Compensation or payment for managing the affairs of an Indian company (or, in India, any other company), holding an agency in India, or in connection with termination/modification of such management, agency or a business contract
- Compensation for vesting the management of property or business in the Government (including a Government-owned/controlled corporation)
- Income of a trade, professional or similar association from specific services performed for its members
- Profit on sale of import licences, cash assistance against exports, duty drawback, duty remission, or other export incentives
- The value of any benefit or perquisite arising from business or the exercise of a profession, in cash or in kind or both
- A partner's interest, salary, bonus, commission or remuneration from their firm, to the extent allowed as a deduction to the firm under section 35(e)
- Amounts received under a non-compete agreement (not to carry out any activity relating to a business/profession) or a non-disclosure agreement (not to share know-how, patents, trademarks or similar rights), subject to specific carve-outs including certain capital gains and Montreal Protocol compensation
- Sums received under a Keyman insurance policy, including bonus allocated on it
- The fair market value of inventory as on the date it is converted into, or treated as, a capital asset
- Sums received or receivable on demolition, destruction, discarding or transfer of a capital asset (other than land, goodwill or a financial instrument) whose full cost was earlier allowed as a deduction under specified provisions
Speculation business treated separately
Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, that speculation business is deemed to be distinct and separate from any other business of the assessee (section 26(3)).
Residential letting is excluded
Income from letting out a residential house or part of it by the owner is not included under this head - it is chargeable only under "Income from house property" (section 26(4)).
Step-by-step flow for applying Section 26
- 1
Is there a receipt, benefit or sum connected with a business or profession?
Section 26(2) lists what is included under the head. Start by identifying the exact nature of the receipt.
- No: Consider the other heads of income, such as Section 92 (income from other sources).
- Yes: Go to the next step.
- 2
Which clause of Section 26(2) does it fall in?
Examples: business profits (clause (a)); termination or modification compensation (clause (b)); export incentives (clause (e)); business benefits or perquisites, in cash or kind (clause (f)); partner's interest or remuneration to the extent allowed to the firm under Section 35(e) (clause (g)); non-compete or non-sharing receipts (clause (h)); Keyman insurance sums (clause (i)); fair market value of inventory converted into a capital asset (clause (j)).
- 3
Does a carve-out take it outside this head?
For example, a sum for transfer of the right to manufacture or to carry on a business that is chargeable under "Capital gains" is excluded from clause (h).
- Carve-out applies: Tax it under the head the carve-out points to.
- No carve-out: Go to the next step.
- 4
Compute the income under the business head
Apply the computation provisions that follow Section 26 (deductions, disallowances and deemed profits) to arrive at the taxable figure for the tax year.
Practical checklist
Do
- Map each business receipt to a clause in subsection (2), including benefits, incentives and termination payments where relevant.
- Separate speculation-business results from ordinary business results.
- Classify an owner's residential-house letting under house property as subsection (4) requires.
Avoid
- Do not exclude a non-cash business benefit just because it was not paid in money.
- Do not combine speculation and ordinary business results without applying their separate rules.
Illustrative example
Worked example: a non-compete payment and a partner's remuneration
Hypothetical facts (illustration only, not a real taxpayer): Ms. Rao is a partner in a firm. During the tax year she receives (i) interest and remuneration from the firm, part of which the firm was allowed to deduct under Section 35(e), and (ii) ₹6 lakh from a competitor under an agreement not to carry on a consulting activity for three years.
Partner's interest and remuneration
Clause (g) includes interest, salary, bonus, commission or remuneration received from the firm only to the extent allowed as a deduction to the firm under Section 35(e). Only that allowed portion is her business income under this clause.
Non-compete receipt
The ₹6 lakh is a sum received under an agreement for not carrying out an activity in relation to a business or profession, so it falls in clause (h)(i).
Check the carve-out
It is not consideration for transferring a right to manufacture or a right to carry on a business that is charged as capital gains, so the exclusion in clause (h)(i)(A) does not apply.
Outcome
- Both receipts are chargeable under "Profits and gains of business or profession" for the tax year.
- If the facts showed a transfer of a business right chargeable as capital gains, the non-compete portion would instead be examined under the capital gains provisions.
Glossary
- Speculation business
- A deemed separate business when the taxpayer's speculative transactions constitute a business under subsection (3).
- Business perquisite
- A benefit arising from business or profession that subsection (2) can include even in kind.
Frequently asked questions
Is a partner's share of remuneration from a firm taxed under this head?
Yes - a partner's interest, salary, bonus, commission or remuneration from the firm is included under "Profits and gains of business or profession", to the extent it was allowed as a deduction to the firm.
Are export incentives like duty drawback taxable?
Yes - profit on sale of import licences, cash assistance against exports, duty drawback, duty remission and similar export incentives are specifically included as business income under Section 26(2)(e).
If I rent out my residential flat, is that taxed as business income?
No - Section 26(4) specifically excludes income from letting a residential house from this head; it is taxed under "Income from house property" instead.
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Talk to our tax team about this sectionLast updated 10 October 2026