Income Tax Act 1961 allows several deductions to help taxpayers better manage their tax liability. Section 36 of Income Tax Act allows individuals to deduct expenses incurred in connection with their business or profession. Taxpayers may claim such tax benefits when calculating business or professional income.
What is section 36 of income tax act?
Section 36 of the Income Tax Act 1961 consists of a list of specific deductions for calculating income from a profession or business. Section 36 lists various expenses deductible from business income.
What is the deduction available under section 36?
The deductions allowable for computing income from business/profession are as follows:
Section 36(1)(i): Insurance premium paid
A premium is payable to an insurance policy to cover the risk of damage/destruction of inventory/store.
Section 36(1) (ib): Premium paid by an employer for health insurance of employees
Contributions (non-cash) paid by an employer for employee health insurance under schemes established by GIC in India or approved by IRDA.
Section 36(1)(ii): Bonus or commission paid to an employee for services rendered
Businesses and professionals can deduct commissions and bonuses they pay to employees in exchange for their services. Voluntary and statutory bonuses also fall under this section and are only claimable in the year of payment.
However, these payments must meet two conditions:
- Bonus or commission must be as per Section 43B of the Income Tax Act.
- These payments must be for rendering services rather than dividends.
Section 36(1)(iii): Interest on borrowed capital
The amount of interest payable on capital borrowed for the business and professional purposes of the beneficiary is allowed as a deduction. Deductions are also permissible under Section 43B if the loan was taken from a bank, PFI, government finance company, or government industrial finance company.
In addition, if capital is borrowed to acquire fixed assets, interest for the period up to the date of use of the assets cannot be deducted.
Section 36(1)(iiia): Discount on a zero-coupon bond
Discount is the difference between the issue amount and the redemption amount. The discount is amortized proportionally over the term (calendar month) of the zero-coupon bond. Targets infrastructure companies, funds, and scheduled banks from the bond issuance date to maturity/redemption date.
Section 36(1)(iv): Employer’s contribution to a recognized provident fund or a superannuation fund
Employer contributions to an accredited provident fund or accredited pension fund are permissible within the limits set for accreditation of the provident fund or accredited pension fund on a payment basis. ie. only years in which the employer actually paid.
Section 36(1)(iva): Employer’s Contribution to National Pension Scheme (NPS)
Employer contributions to pension funds under Section 80CCD (subject to Section 43B).
This amount is available as a deduction for
10% of the employee’s salary or
Actual contribution,
whichever is lower.
Salary means basic pay and dearness allowance.
Section 36(1)(v): Employer contribution to approved gratuity fund
Amounts paid by an assessee as an employer as a contribution to an approved gratuity fund established by the assessee solely for the benefit of the employee under an irrevocable trust shall be deductible under the provisions of Section 43B.
Section 36(1)(va): Employees’ Contribution to Staff Welfare Schemes
Amounts received by employers from employees as contributions to ESI, PF, etc. are deductible. This only applies if the amount received is payable to the respective welfare account on the due date. If an employer does not pay this within the due date, the Income Tax Department will treat it as business/professional income.
Section 36(1)(vi): Allowance about dead/permanently useless animals
Expenditures to acquire animals for business or professional purposes are capital expenditures. However, there is no depreciation charge for such investments.
Also, such investments must be write off as a loss in the year the animal dies or becomes permanently unavailable. In addition, you must deduct the animal’s cost minus any proceeds from the sale of the carcass or animal.
Section 36(1)(vii) and 36(2): Bad Debts written off
If the debt write off as irrecoverable in the accounts of the assessee relates to a business/profession carried on in the previous year if a debt is included in the income of the previous year in which it was earned.
At the time of final settlement, if the amount of the debt collected is less than the total debt minus the allowable debt the shortfall will be allowed as a deduction in a year of recovery, and if the collection amount is greater than the payment after deduction, Excess amount is taxable.
Section 36(1)(viia): Bad debt allowance deduction for banks and certain financial institutions.
The deduction amount is as follows.
- For Indian banks, a deduction equal to 8.5% of gross income + 10% of total advance payments for rural branches are allowed.
- For banks and other financial institutions incorporated outside India, a deduction of 5% of gross income is allowed.
Section 36(1)(viii): Transfer made to a special reserve
Transfers of profits to reverse by certain companies are subject to deduction.
The amount deducted is the lower of
- Amounts transferred in the previous year to a special reserve account established for purposes of Section 36(1)(viii).
- 20% of calculated Section 28 profits before deductions under Section 36(1)(viii) of the IT Act.
- 200% of (General reserve + paid-up capital) – the Opening balance of the special reserve account.
Eligible companies are financial companies that provide long-term loans (minimum of 5 years) to industrial, agricultural, infrastructure, and residential construction companies.
Amounts withdrawn from this reserve will be treated as operating income for the year in which they are withdrawn.
Section 36(1)(ix): Expense on family planning of employees
Expenditures to facilitate family planning for employees are also deductible. The deduction must be claimed in five installments and the tax authorities will consider the first installment of the year in which the expense is incurred.
There is no Section 36(1)(ix) deduction for non-corporate assessees. Non-corporate assessees may claim deductions under Sections 32 and 37(1) if the relevant requirements are met.
Section 36(1)(xv): Securities Transaction Tax(STT)
It is permissible for a business transaction if the income from the taxable securities transaction is generated and included under the head profits/gains from business/profession.
Section 36 (1) (xvi): Commodities Transaction Tax paid (CTT)
It is permissible for a business transaction if the income from the taxable securities transaction is generated and included under the head profits/gains from business/profession.
For this purpose, taxable commodities transaction means the sale of a commodity derivative or the sale of a commodity derivative based on the price or price index of the commodity derivative or commodity derivative options or options on commodities related to agricultural commodities, traded in the recognized stock exchange.
Section 36(1)(xiv ): Contribution to credit guarantee trust fund
Public financial institutions can deduct contributions made to credit guarantee funds for small and micro enterprises as deductions.
Section 36(1)(xvii): Expenditure by co-operative society for purchase of sugarcane
Expenditures by sugar-producing co-operatives to purchase sugar cane at prices below those set or approved by the state are allowed as deductions.
Section 36(1)(xviii): Marked to Market Loss
Market value losses or other expected losses calculated according to ICDS (Income Computation and Disclosure Standards) standards are allowed as deductions.
Frequently Asked Questions (FAQ)
What is Section 43B?
According to Section 43B of the Income Tax Act of 1961, certain payments may be recognized as an expense in the year the payment is made rather than in the year the liability is incurred.
What is section 36 disallowance of Income Tax Act?
Disallowance of U/S 36(1)(va) of the Income Tax Act relating to delayed payment of employee contributions to EPF or ESIC. Amounts paid in the form of interest/penalties are not allowed for deduction.
Are banks incorporated outside India eligible to claim section 36 deduction?
Banks incorporated outside the jurisdiction of India can also claim bad debt reserves as a deduction. However, this is limited to 5% of the total gross revenue for the previous fiscal year.
Wrapping Up
36 of the Income Tax Law allows businesses and professionals to reduce their tax liability by deducting expenses incurred in carrying out their activities. Taxpayers should review each subsection carefully and claim deductions according to the prescribed rules.