Income tax

The idea

The government is a sleeping partner in every business. It does not open the shop or chase payments, but it takes a share of the profit. Its share is worked out on taxable profit, not on the profit your books show, and it expects to be paid through the year — that is advance tax.

Book profit and taxable profit

Book profit is what your profit and loss statement shows (chapter 1.9). Taxable profit is book profit after the tax law's own adjustments. The partner reads your books, but with its own rules: some expenses it will not share, and some it counts differently.

A stockist's books for the year show a profit of ₹12,00,000. The adjustments look like this:

The pattern is simple. Personal expenses are not business expenses. Fines and penalties for breaking the law are not allowed. Large cash payments above the legal limit are not allowed. Depreciation follows the tax rates, not your book rates. Two more that catch stockists: an expense on which you should have deducted TDS but did not (chapter 1.17), and a bill owed to a small registered (MSE) supplier that you paid later than the law allows. Both can be disallowed for the year. The exact limits and conditions change, so check the current rules on incometax.gov.in or with your CA.

How much the partner takes

The rate depends on who owns the business. A proprietor pays tax as an individual, on slab rates that rise with income. A partnership firm and a company pay at their own rates. Rates change in almost every Budget, so take the current figures from incometax.gov.in, not from memory.

Small businesses can choose a simpler scheme, often called presumptive taxation, where profit is taken as a fixed share of turnover instead of being worked out from the books. People still call it "44AD", its section number in the old Act. Whether you qualify, and what share applies, is a question for your CA. You still need proper books to run the business.

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbered the sections. You will keep hearing the old numbers; your CA will know the new ones.

Advance tax

The sleeping partner does not wait till the year ends. If your tax for the year is above a small limit, you pay it in instalments on fixed dates during the year, each a set share of the estimated total. Pay late or pay too little and you are charged interest for the delay. Check the current dates, shares and limit on incometax.gov.in.

To pay advance tax on time, you need a rough profit figure every quarter. That means books kept up to date, not written up in May.

Common mistake

Waiting for the CA to "calculate the tax at year-end". By then every advance tax date has passed, and interest has been running on each missed instalment. The tax is the same; the interest is pure loss. A quarterly profit estimate — even a rough one — avoids it.

Where you'll use this

In Part 3, brand-wise profit tells you which distributorship is worth keeping. When a company rejects a claim for good, write it off with a proper entry in the year it is rejected. A loss that never reaches the books is a loss the tax return cannot see.

Check yourself

1. Book profit is ₹8,00,000. The owner's personal travel of ₹25,000 was booked as an expense. What is taxable profit, ignoring everything else?
2. Why does a stockist need a rough profit figure every quarter?
3. Is income tax worked out on book profit or on taxable profit?

Answers

1. ₹8,25,000. The personal expense is added back.
2. To pay advance tax in instalments on time and avoid interest.
3. On taxable profit — book profit after the tax law's adjustments.