What is Book Profit vs. Taxable Profit?
Nexa Consultancy | Startup & Finance Glossary
Book Profit is the profit calculated as per the company's books of accounts, following standard accounting principles. Taxable Profit is the profit calculated according to the specific rules of the Income Tax Act. The two figures are often different because the tax law treats certain incomes and expenses differently than accounting standards do.
For Startups: A common reason for the difference is depreciation. A startup might depreciate its laptops over 3 years in its books, but the Income Tax Act might specify a different rate. Other differences can arise from expenses that are disallowed for tax purposes. A reconciliation between book profit and taxable profit is a mandatory part of the tax filing process.
Example: A startup's book profit is ₹10 Lakhs. However, after disallowing certain expenses for tax purposes, its taxable profit is calculated to be ₹12 Lakhs. The company will pay tax on ₹12 Lakhs.