Business Income Under The New Income Tax Act: What Every Business Owner Must Know

If you run a business or advise one, you've probably heard the chatter about the Income-tax Act, 2025 replacing the six-decade-old 1961 Act. Most of the conversation has centred on personal taxation and the new slab structure. Business income has quietly undergone its own transformation, and it deserves more attention than it's getting.

The new Act applies from 1st April 2026, so Tax Year 2026-27 is the first full year businesses will compute profits under this framework. If your accounting team is still thinking in terms of Section 28 to 44DA, it's time for a reset.

Why This Change Matters to You

The old Chapter IV-D of the 1961 Act, covering "Profits and Gains of Business or Profession," had grown unwieldy over sixty years of patchwork amendments. Provisos stacked on explanations, and cross-references pointed to sections no one could locate without a bare act in hand. The 2025 Act doesn't rewrite the policy — the tax base, deductions, and disallowances are largely unchanged — but it reorganises everything into a cleaner, tighter sequence, with related provisions grouped instead of scattered across the statute.

For a business owner, this isn't academic tidying. Your accountant, tax software, and compliance calendar all need to speak the new language now.

The Charging Section: From Section 28 to Section 26

Under the old law, Section 28 decided what counted as business income. In the new Act, that job belongs to Section 26. The substance is nearly identical — profits from any business or profession carried on during the year, compensation received on termination of agency or management contracts, benefits and perquisites arising from business, Keyman insurance proceeds, and a partner's share of interest, salary, bonus, or commission from a firm.

One terminology shift worth flagging: "previous year" is now "tax year." Tax Year 2026-27 simply means income earned between 1st April 2026 and 31st March 2027. It sounds trivial until an ITR utility, a Form 3CD, or a client's board resolution uses the old term and someone in the finance team gets confused.

Computation Framework: Section 27 Takes Over From Section 29

Section 29 of the old Act told you to compute business income as per Sections 30 to 43D. That baton has passed to Section 27, which routes computation through Sections 28 to 66 of the new Act. The mechanics haven't moved: start with turnover or gross receipts, subtract allowable expenses, add back disallowances, and arrive at net taxable profit.

What has genuinely changed is how the deduction provisions are grouped. Depreciation moves from the familiar Section 32 to Section 33, still built around the block-of-assets method and written-down value, with no change to rates or eligibility. Scientific research expenditure, weighted deductions, and skill development spending  earlier scattered across Sections 35, 35AD and related clauses  now sit together under Sections 45 to 47, making them easier to locate during assessment.

The MSME Payment Rule Hasn't Gone Anywhere

Several business owners assume the substance softens whenever a law is re-enacted with new numbers. It hasn't here. The actual-payment principle from the old Section 43B, including the much-discussed Section 43B(h) on delayed payments to micro and small enterprises, now lives in Section 37.

The rule remains strict: payments to MSME suppliers must be made within 15 days (no written agreement) or 45 days (written agreement) as prescribed under the MSMED Act, 2006. Miss that window and the deduction shifts to the year you actually pay  there's no relief even if you clear the dues before your return's due date, unlike PF contributions, bonus, or statutory taxes, which do get that grace period.

Practical example: A garment manufacturer buys fabric worth ?8 lakh from a Udyam-registered small enterprise in February 2027, with no written agreement. If payment isn't made within 15 days, the expense is disallowed for Tax Year 2026-27, even if paid in April 2027 before the return is filed. The deduction simply shifts to Tax Year 2027-28.

Presumptive Taxation Gets a Single Home

This is one of the more welcome consolidations. Under the old law, small businesses used Section 44AD, professionals used 44ADA, and goods transport operators used 44AE — three separate sections with overlapping logic. The new Act merges all three into Section 58, structured as a single table with distinct entries for each category.

A resident individual, HUF, or partnership firm (excluding LLPs) with turnover up to ?2 crore — or ?3 crore where cash receipts don't exceed 5% of total receipts — can still declare income at 6% of digital turnover plus 8% of the balance, or actual profit if higher. Specified professionals retain their ?50 lakh / ?75 lakh thresholds. One catch that surprises people: opting out after using Section 58 locks you out of it for the next five years, so choose carefully.

Common Mistakes I'd Watch Out For

Businesses transitioning between the two Acts tend to stumble in predictable ways. Filing FY 2025-26 returns still means citing the 1961 Act, Section 43B, Section 32, Section 28  because Section 536 of the new Act preserves the old law for that year through a saving clause. Applying 2025 Act sections retrospectively only creates confusion in audit reports and Form 3CD.

Another recurring issue is assuming depreciation rates changed because the section number did they haven't. Businesses also get sloppy about segregating trade payables by Udyam status; a payable to a medium enterprise or an unregistered vendor doesn't attract the MSME disallowance at all, but finance teams often flag it out of caution and distort their computation unnecessarily.

Compliance Tips Going Forward

Update your chart of accounts and audit checklists to reference the new section numbers before Tax Year 2026-27 filings begin. Train your accounts payable team on the 15/45-day MSME clock real cash gets lost to disallowance here every year. Reconcile your Udyam-registered vendor list quarterly, and keep a mapping sheet between old and new section numbers for transactions straddling both tax years.

Frequently Asked Questions

Is business income taxed differently under the new Act? No. Policy, rates, and deduction logic remain substantially the same; only structure and numbering have changed.

From when does Section 26 apply? From Tax Year 2026-27, effective 1st April 2026. FY 2025-26 still follows the old 1961 Act.

Does the MSME 45-day payment rule still apply? Yes, unchanged, now under Section 37(2)(g) instead of Section 43B(h).

Has depreciation changed under Section 33? No. Rates, methods, and eligibility mirror the old Section 32; only drafting is restructured.

Can a business switch freely in and out of presumptive taxation? No. Opting out of Section 58 after using it bars re-entry for the next five tax years.

Final Word

Change of this scale rarely means change of substance  but it does mean relearning where things sit in the statute. Align your systems and checklists with the new section numbers before the first tax year under the new Act closes, and consult your tax advisor on any transaction you're unsure how to map across the transition.