Section 26 of the Income-tax Act, 2025 charges income under the head Profits and gains of business or profession, and specifies what it includes: profits of any business carried on in the year, compensation on termination, export incentives, benefits or perquisites, and partner's remuneration.
What section 26 does
Section 26 is the charging section for business income — the successor to section 28 of the Income-tax Act, 1961. It does two things: it charges the income under the head, and it lists the items that fall within it.
The list matters because several items would not obviously be 'profits' in a commercial sense. Compensation on termination or modification of a management, agency or business contract is business income. So are export incentives — sale of an import licence, cash assistance, duty drawback and duty remission.
Two clauses catch people out. Clause (f) brings in the value of any benefit or perquisite arising from business or the exercise of a profession, whether convertible into money or not, and whether in cash or in kind — the provision behind the taxation of business freebies. And clause (g) brings partner's interest, salary, bonus, commission or remuneration from a firm into business income, which is why section 15(4) keeps it out of the salary head.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 28(i) | Profits and gains of business or profession | 26(2)(a) |
| 28(ii) | Compensation on termination or modification | 26(2)(b) and (c) |
| 28(iii) | Income of a trade or professional association from specific services | 26(2)(d) |
| 28(iiia) to (iiie) | Export incentives | 26(2)(e) |
| 28(iv) | Value of benefit or perquisite from business | 26(2)(f) |
| 28(v) | Partner's interest, salary, bonus, commission | 26(2)(g) |
| 15 | Salary head — partner's remuneration excluded | 15(4) |
Section 26 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the charge
The incomes referred to in sub-section (2) are chargeable to income-tax under the head Profits and gains of business or profession. The computation machinery then follows in sections 27 to 66.
Clause (2)(a) — the core
The profits and gains of any business or profession carried on by the assessee at any time during the tax year. The words 'at any time during' matter: a business carried on for part of the year, or discontinued mid-year, is still within the head for that year.
Clauses (2)(b) and (c) — compensation on termination or takeover
Compensation or other payment due to or received by any person for wholly or substantially managing the affairs of an Indian company, or in India of any other company; for holding an agency in India; or in connection with the termination or modification of a management, office, agency or business contract. Clause (c) adds compensation for vesting of the management of property or business in the Government or a Government-owned corporation.
Clause (2)(d) — trade and professional associations
Income derived by a trade, professional or similar association from specific services performed for its members. Ordinary membership subscriptions are treated differently; it is the charge for specific services that this clause brings into business income.
Clause (2)(e) — export incentives
Profits on sale of an import licence, cash assistance against exports, duty drawback, duty remission or any other export incentive, whether received or receivable. Note the words or receivable — the accrual basis applies, so an incentive earned but not yet received is taxable.
Clause (2)(f) — benefits and perquisites from business
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 both. The 2025 drafting keeps the position that non-monetary benefits are taxable, which is why section 393 also requires deduction on such benefits.
Clause (2)(g) — the partner's remuneration link
Any interest, salary, bonus, commission or remuneration received by a partner from the firm is business income. Read this with section 15(4), which expressly keeps it out of the salary head — so no standard deduction under section 19 is available against it.
Worked example
A consultancy firm and its partner in tax year 2026-27.
| Receipt | Head | Clause |
|---|---|---|
| Consulting fees from clients | Business or profession | 26(2)(a) |
| Compensation received for early termination of a retainer contract | Business or profession | 26(2)(b)(iii) |
| Duty drawback receivable on an export of services-linked goods | Business or profession | 26(2)(e) — taxable on a receivable basis |
| A foreign trip funded by a vendor as a business incentive | Business or profession | 26(2)(f) — a benefit in kind, taxable though not convertible into money |
| Partner's remuneration of ₹18,00,000 from the firm | Business or profession, in the partner's hands | 26(2)(g), read with section 15(4) |
| Interest on the partner's capital | Business or profession | 26(2)(g) |
The last two rows have a practical consequence. Because partner's remuneration is business income and not salary, the partner gets no standard deduction under section 19, and their advance tax and books obligations follow the business regime — including section 62 for books and section 63 for tax audit.
Compliance checklist and due dates
- Bring export incentives to tax on a receivable basis, not only on receipt — clause (2)(e).
- Value and offer non-monetary benefits received in the course of business under clause (2)(f); expect tax to have been deducted on them under section 393.
- Report partner's remuneration and interest as business income, not salary, and do not claim the section 19 standard deduction against it.
- Treat compensation on termination or modification of a business contract as business income, not a capital receipt.
- Remember a business carried on for part of the year is still within the head.
- Trade and professional associations should separate income from specific services to members from general subscriptions.
Common mistakes
- Treating termination compensation as a non-taxable capital receipt.
- Offering export incentives only when received, when clause (2)(e) covers receivable amounts.
- Ignoring benefits in kind because they cannot be converted into money — clause (2)(f) covers them expressly.
- Claiming salary deductions against partner's remuneration.
- Assuming a discontinued business falls outside the head for that year.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.