Section 36 – Other Deductions

Section 36 of the Indian Income Tax Act, 1961, provides a list of explicit deductions for computing income arising from profession or business. Section 36 of the Income Tax Act elucidates the expenses which are allowed as deductions from the income earned from profession or business.

 illustrative list of expenses that are covered under Section 36:·

  • Deduction for insurance Premium with respect of risk to destruction or damage of stock in trade, the life of the cattle, and employees’ health insurance.
  • Commission or bonus to employees for their services – Bonus irrespective of statutory bonus or voluntary, is allowed as a deduction in the year of payment subject to provisions laid down in Section 43B.
  • Interest on borrowed capital – Interest on the borrowed sum for a profession or business is allowed as a deduction on the basis of payment. However, it should be noted that when any sum is borrowed for the purpose of acquisition of a capital asset, the interest relating to the period till such capital asset is put to use isn’t allowed as a deduction under Section 36.
  • Discount on a zero-coupon bond is allowed as a deduction under Section 36, however, the amount of discount should be amortized over the life of such zero-coupon bonds.
  • Contribution to the provident fund or a superannuation fund by the employer is allowed as a deduction on a payment basis and not deduction will be allowed on an accrual basis.
  • Contribution by the employer towards a pension fund as specified under Section 80 CCD, however, the deduction allowed will be limited to the extent of 10 percent of employees’ salary.
  • Contribution by the employer towards a gratuity fund – Similar to other statutory contributions, the deduction for contribution towards a gratuity fund is on the payment basis.
  • Contribution by the employer towards any staff welfare schemes
  • Write-off animals which are used as part of the business – Deductions with respect to the write-off of animals that used in a business which have become useless or died
  • Writing off bad debts – This could be claimed if such bad debts are related to the profession or business and must have been considered while computing the income from such profession or business. However, the deduction isn’t allowed for any provision created for the bad debt.
  • Provision for bad debts for banks and financial institutions – The amount of deduction for Indian Banks will be equal to 8.5 percent of their gross total income plus 10 percent of their aggregate average advances made by the rural branches. For banks that are incorporated outside India and other financial institutions, the deduction will be limited to the extent of 5 percent of their gross total income.
  • Transfer to special reserve – When profits from the eligible business are transferred to a reserve it could be claimed as a deduction under this section. Under this section, the deduction allowed is limited to the maximum of the following:
    • 20 percent of profits from the eligible business
    • Amount transferred limited to 200% of the total of paid-up capital and general reserves
    • Here eligible business refers to a business providing long-term finance for agricultural, industrial, infrastructure, and housing development companies. It should be noted that any amount which is withdrawn from this reserve would be considered as a business income and will be chargeable to tax in the year in which such withdrawal is done.
  • Expense on promoting family planning of employees – It is allowed as a deduction when such expenses are of capital nature, and it’s allowed in five equal annual installments starting from the year in which it’s incurred.
  • Securities Transaction Tax(STT) / Commodities Transaction Tax(CTT)
  • Contribution to credit guarantee trust fund.

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March 2021