Circular No. 464-Income Tax dated 18/7/1986

Amendments

Income-tax (Amendment) Act, 1986

Deduction in respect of the premium paid for insurance on health

4.1 In para 98 of the Budget speech for the year 1986-87, the Finance Minister had announced a proposal to provide relief to self-employed persons and salary earners other than those whose medical needs were taken care of by the employers in respect of medical expenses incurred by them by allowing a deduction out of their total income, subject to limits, for any premium on medical insurance policies taken by them with the General Insurance Corporation of India.

Income-tax (Amendment) Act, 1986

4.2 In pursuance of the above, the Amending Act has inserted a new clause (ib) in sub-section (1) of section 36 of the Income-tax Act to allow a deduction to an employer in respect of premium paid by him by cheque for insurance on the health of his employees in accordance with a scheme framed in this behalf by the General Insurance Corporation of India and approved by the Central Government. This deduction will not have any monetary ceiling. The scheme is being finalised separately.

Income-tax (Amendment) Act, 1986

4.3 Further, the Amending Act has inserted a new section 80D in the Income-tax Act to provide a deduction to an assessee up to Rs. 3,000 a year in respect of premium paid by him by cheque for insurance,

(i) on his health or on the health of his spouse or dependent parents or dependent children ; and

(ii) in the case of a Hindu undivided family or association of persons or body of individuals consisting only of (in either case) husband and wife governed by the system of community of property in force in the Union Territories of Dadra and Nagar Haveli, Goa, Daman and Diu, on the health of any member of such family, association or body of individuals.

Income-tax (Amendment) Act, 1986

Modification in respect of deduction on provisions for bad and doubtful debts made by the banks

5. Under the existing provisions of clause (viia) of sub-section (1) of section 36 of the Income-tax Act inserted by the Finance Act, 1979, provision for bad and doubtful debts made by scheduled or a non-scheduled Indian bank is allowed as deduction within the prescribed limits. The limit prescribed is 10 per cent of the total income or 2 per cent of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent, they were being discriminated against. Further, it was felt that the existing ceiling in this regard, i.e., 10 per cent of the total income or 2 per cent of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under clause (viia) of sub-section (1) of section 36 of the Income-tax Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2 per cent of the aggregate average advances made to by rural branches of the banks concerned. It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provisions secure that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks, not just the banks incorporated in India, limited to 5 per cent of the total income (computed before making any deduction under this clause and Chapter VIA). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction up to 2 per cent of the aggregate average advances made by such branches and a further deduction up to 5 per cent of their total income in respect of provision for bad and doubtful debts.

Income-tax (Amendment) Act, 1986

Enhancement of deduction in respect of profits and gains from projects outside India

6. As per the existing provisions of section 80HHB of the Income-tax Act, where the gross total income of an Indian company or a person (other than a company) who resides in India includes any profits or gains arising from the execution of projects outside India, a deduction from such profits or gains equal to 25 per cent thereof is admissible. In order to encourage the activity of execution of projects outside India which is one of the sources of earning foreign exchange, section 80HHB has been amended to secure that the deduction will be admissible of an amount equal to 50 per cent of such profits.