Section 27 of the Income-tax Act, 2025 — How Business Profits Are Computed

In plain language

What Section 27 actually says

Section 27 of the Income-tax Act, 2025 is a "machinery" provision. It carries the heading "Manner of computing profits and gains of business or profession" and simply directs that the income which is made taxable by Section 26 shall be computed in accordance with Sections 28 to 60 (except Section 58). In plain words: Section 26 tells you what business income is taxable; Section 27 tells you how to arrive at the taxable figure — by applying the deduction, depreciation, disallowance and special-computation rules that follow it.

This mirrors the old law almost exactly. Section 27 of the 2025 Act is the successor to Section 29 of the Income-tax Act, 1961, which said that income under Section 28 (1961) "shall be computed in accordance with the provisions contained in sections 30 to 43D." The 2025 Act renumbers everything, but the design is unchanged.

Who it applies to

• Every person with income under the head "Profits and gains of business or profession" (PGBP) — sole proprietors, partnership firms, LLPs, companies, professionals (CAs, doctors, lawyers, architects, consultants), traders, manufacturers and freelancers.
• It applies whether you keep full books of account or not; the moment your income falls under Section 26, Section 27 governs how it is measured.
• It does not apply to income taxed under other heads — salary, house property, capital gains or other sources have their own computation machinery.

How the computation actually works

Section 27 routes you to the toolbox in Sections 28 to 60. The broad flow is:

• Start with net profit as per the profit and loss account (or gross receipts if you do not maintain books).
• Add back expenses that are debited in the accounts but are not allowable — personal expenses, capital expenditure, income-tax, disallowed cash payments, unpaid statutory dues, TDS-default expenses, etc.
• Deduct the specific allowances the law permits — rent, rates, taxes, repairs and insurance (Section 28), depreciation on the written-down-value/block-of-assets basis (around Section 33), interest on borrowed capital, staff welfare, and the general "wholly and exclusively for business" deduction.
• Apply special adjustments — deemed profits on remission of liabilities, actual-payment rules for PF/ESI/bonus/GST, and other timing provisions.

Why Section 58 is carved out

Section 58 is deliberately excluded from Section 27's computation route. Section 58 is the unified presumptive taxation scheme (the 2025 successor to Sections 44AD, 44AE and 44ADA of the 1961 Act). It computes income on a deemed-percentage basis instead of on actual books, so it is a self-contained code. If you opt for presumptive taxation, your income is fixed by Section 58 itself — you do not go through the normal Section 28-to-60 add-back/deduction machinery, which is exactly why Section 27 leaves it out.

How it interacts with related sections

• Section 26 is the charging section (what is taxable); Section 27 is the computation section (how to measure it) — they are read together.
• Sections 28 to 60 supply the deductions, depreciation and disallowances the computation depends on.
• Section 58 is the presumptive alternative that bypasses this machinery.
• Once the PGBP figure is computed, it feeds into gross total income, is set off against losses, and is finally taxed at the applicable slab or corporate rate.

Practical implications for taxpayers

• Section 27 by itself imposes no new tax and grants no new deduction — its value is that it fixes the legal method, so an assessing officer cannot pick and choose an ad-hoc basis of computation.
• Because the answer depends entirely on Sections 28 to 60, good books of account, correct classification of capital vs revenue expenditure, and TDS/actual-payment compliance directly change your tax.
• If your turnover is within presumptive limits, you can step outside this machinery via Section 58 — often simpler, but you lose the ability to claim actual (higher) expenses.