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Case law › Income-tax Act 2025 › Chapter IV › Section 26
Chapter IVwas s.28

Section 26 of the Income-tax Act, 2025

Section 26 — Income under head "Profits and gains of business or profession". Successor to s.28 of the 1961 Act.

Where this section sits

Section 26 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.

← Section 25  ·  Section 27 →

What this section does

Sub-section (1) is the charge: the incomes listed in sub-section (2) are chargeable under the head "Profits and gains of business or profession".

Sub-section (2) then lists what that head includes. Clause (a) is the ordinary case — profits and gains of any business or profession carried on by the assessee at any time during the tax year. Clauses (b) and (c) pull in compensation: (b) for termination or modification of terms of a management of an Indian company's affairs or, in India, of any other company's affairs, of an agency in India, or of any contract relating to business; (c) for vesting the management of property or business in the Government or a Government corporation. Clause (d) covers income of a trade, professional or similar association from specific services performed for its members. Clause (e) covers profits on sale of an import licence, cash assistance against export, duty drawback, duty remission or any other export incentive, received or receivable. Clause (f) brings in the value of any benefit or perquisite arising from business or the exercise of a profession, whether or not convertible into money and whether in cash, in kind or partly each.

Clause (g) charges interest, salary, bonus, commission or remuneration due to or received by a partner from the firm, but expressly only "to the extent allowed under section 35(e) as a deduction in computing the income of the firm". Clause (h) charges non-compete and non-sharing receipts — sums under an agreement not to carry on an activity in relation to a business or profession, or not to share know-how, a patent, copyright, trade-mark, licence, franchise or similar right — while carving out a sum for transfer of the right to manufacture, produce or process or to carry on a business, which is chargeable under "Capital gains", and compensation from the Montreal Protocol multilateral fund. Clause (i) covers any sum received under a Keyman insurance policy including bonus allocated on it. Clause (j) charges the fair market value of inventory on the date it is converted into or treated as a capital asset, determined in the manner as may be prescribed. Clause (k) charges sums received or receivable where a capital asset other than land, goodwill or a financial instrument is demolished, destroyed, discarded or transferred and the whole expenditure on it was allowed under section 35AD of the Income-tax Act, 1961 or section 46 of this Act.

Sub-section (3) deems a speculation business, where speculative transactions are of such a nature as to constitute a business, to be distinct and separate from any other business. Sub-section (4) takes income from letting out a residential house or part of it by the owner out of this head entirely and makes it chargeable only under "Income from house property".

Why it is there

The head needs a boundary, and most disputes about business income are about receipts that are not trading profits at all — compensation for losing an agency, an export incentive, a benefit in kind, a non-compete fee. Sub-section (2) settles their character by naming them. Sub-sections (3) and (4) then fence the head from the inside: speculation is walled off as a separate business, and residential letting by the owner is pushed to the house property head so the same rent cannot be argued into whichever head suits.

Who it applies to

What this means in practice

Two clauses decide most real cases. Clause (g) does not charge the partner with everything the firm paid him: only so much of the interest, salary, bonus, commission or remuneration as was allowed to the firm as a deduction under section 35(e) is business income in his hands, so a disallowance at the firm's level reduces the partner's charge to the same extent. Clause (h) turns on what was sold — a payment for agreeing not to compete or not to share know-how is business income here, but a payment for transferring the right to manufacture, produce or process or the right to carry on the business is expressly kept for "Capital gains". Clause (f) is wider than it looks: a benefit or perquisite is charged whether or not it is convertible into money, so a non-cash benefit received in the course of business is taxable at its value. And sub-section (4) is absolute — rent from letting a residential house by the owner cannot be shown as business income even by a person whose business is property.

An example

Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.

A firm pays a partner Rs. 30 lakh as remuneration for a tax year, and on assessment only Rs. 22 lakh is allowed to the firm as a deduction under section 35(e). Under clause (g) the partner is chargeable under this head on Rs. 22 lakh, not on the Rs. 30 lakh he actually received. If the same partner separately receives Rs. 50 lakh under an agreement not to carry on a competing activity, that sum is charged under clause (h)(i); had the payment instead been for transferring his right to carry on the business, the carve-out in clause (h)(i)(A) would send it to "Capital gains".

Where you meet this section

You meet it every time a receipt has to be placed under a head in the return, and in an assessment order that re-characterises a receipt — typically a compensation, incentive, non-compete or Keyman policy receipt — as business income under a named clause of sub-section (2).

The words themselves

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
Section 26(2)(g), Income-tax Act, 2025.
the value of any benefit or perquisite arising from business or the exercise of a profession, whether— (i) convertible into money or not
Section 26(2)(f), Income-tax Act, 2025.
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".
Section 26(4), Income-tax Act, 2025.

What people get wrong

What this replaced

The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.

See the full 1961 to 2025 concordance.

Rules that serve this section

Rules of the Income-tax Rules, 2026 that work section 26. Where the rule’s own heading names the section we say so; the rest are marked on reading the rule, which is our derivation and not the department’s. A rule that serves the section silently and that we have missed will not appear here.

All of them are in the Rules 2026 index.

Circulars of the Board on this section

A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.

See every circular and notification on this section, or the circulars index.

Notifications that reach this section

A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.

See every circular and notification on this section, or the notifications index.

Case law carried across

Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 26. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.

Explainers

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What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.