Think of Section 28 as the entry gate to the head "Profits and Gains of Business or Profession" (PGBP). Before you can compute tax under this head, you need to know what exactly counts as business income — and that is precisely what Section 28 lists out.
The most important clause is (i): any profits from a business or profession carried on at any time during the previous year is taxable. Notice the phrase "at any time" — even if Mr. Sharma ran his hardware shop for just one month before closing it, the profit from that month is still taxable under PGBP. Clause (iv) extends this to perquisites from business — if a supplier gifts Rajesh & Co. Pvt. Ltd. a free laptop for placing bulk orders, the fair market value of that laptop is income under PGBP. Clause (v) is critical for partnership questions: any salary, bonus, commission, or interest received by a partner from their firm is taxable in the partner's hands under PGBP (not under salary). The proviso adjusts this if the firm was denied a deduction under Section 40(b) — the partner's income is reduced proportionately to avoid double taxation.
Clauses (ii)(a) to (e) cover compensation received for termination or modification of management contracts or agency agreements — these are lump-sum payments that might look like capital receipts, but the law specifically taxes them as PGBP income. Clause (iii) brings in income of a trade or professional association from specific services to its members (e.g., a CA association charging members for CPE seminars). Clauses (iiia) to (iiie) deal with export-linked receipts — duty drawback, cash assistance against exports, and profits on transfer of duty entitlement pass books are all PGBP income. Clause (va) covers non-compete fees received in cash or kind — if Ms. Iyer sells her business and signs an agreement not to compete, the consideration she receives is taxable under PGBP. This is asked frequently as a 4-mark theory question in exams.
📊 Worked example
Example 1 — Partner's remuneration (Clause v)
Rajesh is a partner in M/s Sunrise Traders. During PY 2025-26, the firm pays him:
- Salary: ₹3,00,000
- Interest on capital: ₹1,20,000
- The firm was allowed to deduct the full salary but only ₹80,000 of the interest under Section 40(b)
Working:
| Item | Firm allowed | Partner taxable |
|---|---|---|
| Salary | ₹3,00,000 | ₹3,00,000 |
| Interest — allowed portion | ₹80,000 | ₹80,000 |
| Interest — disallowed portion | ₹40,000 | Nil (proviso to Sec 28(v)) |
Total income of Rajesh under PGBP = ₹3,00,000 + ₹80,000 = ₹3,80,000
Note: The ₹40,000 disallowed in the firm is not taxed again in Rajesh's hands.
---
Example 2 — Non-compete fee (Clause va)
Ms. Iyer sells her fashion design consultancy to a large company for ₹15,00,000. As part of the deal, she signs a 3-year non-compete agreement and receives an additional ₹5,00,000 for agreeing not to practise in India.
Working:
- Sale consideration of business → Capital Gains (assessed separately)
- Non-compete fee received → Section 28(va) → taxable under PGBP
Amount taxable under PGBP = ₹5,00,000
This is taxable in full; no deduction is allowed against it.
⚠️ Common exam mistakes
- Treating partner's remuneration as 'Salary' income. Don't classify a partner's salary or interest from their firm under the head 'Salaries' — it is always taxable under PGBP per Section 28(v).
- Ignoring the Section 40(b) proviso. Students often tax the full interest/salary in the partner's hands even when part of it was disallowed in the firm. Apply the proviso: only the allowed portion is taxable in the partner's hands.
- Treating compensation for agency termination as a capital receipt. Any lump sum received for termination of a management contract or agency agreement [Clause (ii)] is specifically included in PGBP — do not show it as a capital gain or exempt amount.
- Missing export-related incomes. Duty drawback [Clause (iiic)] and cash assistance against exports [Clause (iiib)] are frequently missed. Both are PGBP income even if they look like government refunds or subsidies.
- Assuming non-compete fees are always capital gains. The AY question often involves a sale of business plus a non-compete agreement. The sale proceeds → Capital Gains; the non-compete fee → PGBP under Section 28(va). Don't club them.
📖 Bare Act text — Section 28, Income Tax Act 1961
(click to expand)
The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",—
(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
(ii) any compensation or other payment due to or received by,—
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
(b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
(c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;
(d) any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;
(e) any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business;
(iii) income derived by a trade, professional or similar association from specific services performed for its members;
(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);
(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
(iiic) any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);
(iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm: Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted;
(va) any sum, whether received or receivable, in cash or kind, under an agreement for—
(a) not carrying out any activity in relation to any business or profession.
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