Section 36 of Income Tax Act, 1961

Section 36 of the Income Tax Act deals with the list of specific expenses which are allowed for the purpose of computation of income chargeable to tax under the business and profession head of income.

INDEX

Section 36(1)(i) – Insurance Premium

Insurance Premium deduction u/s 36(1)(i) is in three parts. First is in respect of risk of damage or destruction of stock in trade second for life of the cattle and last one for health insurance of employees.

Section 36(1)(i) Deduction for insurance premium paid to cover the risk of damage and destruction of stock in trade, used for the purpose of Business & Profession of the assessee.
Section 36(1)(ia) Insurance premium paid by Federal Milk Cooperative Society for the life of cattle owned by the members to primary society supplying milk to it shall be allowed as deduction.
Section 36(1)(ib) Deduction for health insurance premium paid for insurance of employees. Deduction will be allowed for the premium paid by any mode other than cash.

Section 36(1)(ii) – Bonus or Commission to Employees

Statutory bonus or voluntary bonus shall be allowed as deduction in the year of payment subject to provisions of section 43B and it shall be allowed only if bonus paid is not in lieu of dividends or profits.

Section 36(1)(iii) – Interest on Borrowed Capital

The amount of interest paid in respect of capital borrowed for the purpose of Business & Profession of assessee shall be allowed as deduction.
Also deduction shall be allowed subject to the section 43B if the loan is taken from bank, PFI, state financial corporation or state industrial financial corporation.

Moreover, When the capital is borrowed for acquisition of a capital asset, then interest liability pertaining to the period till the date such asset is put to use shall not be allowed as deduction.

Section 36(1)(iiia) – Discount on issue of Zero Coupon Bonds

Discount on a zero-coupon bond is available as a deduction under Section 36. However, pro-rata amount of discount amortized over the life (calendar months) of the zero-coupon bonds will be allowed.

Section 36(1)(iv) – Employer’s contribution to provident fund or superannuation fund

Employer’s contribution to recognized provident fund or a superannuation fund is allowed as a deduction subject to limits laid down for the purpose of recognizing the provident fund or approved superannuation fund, on the payment basis i.e only in the year when it is actually paid by the employer.

Section 36(1)(iva) – Employer’s Contribution to National Pension Scheme (NPS)

Employer can claim deduction for contribution 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.

Moreover, salary includes dearness allowance but excludes other perquisites and other allowances.

Section 36(1)(v) – Employer contribution towards Approved Gratuity Fund

Deduction is allowed for the amount paid towards the approved gratuity fund created by employer exclusively for the benefit of his employees under an irrevocable trusts. However, it is subject to the provisions of section 43B.

Section 36(1)(va) – Employees’ Contribution to Staff Welfare Schemes

Any sum deducted from the salary of the employee as his contribution to any provident fund or superannuation fund or ESI or any other fund for the welfare of such employee is treated as an income of the employer as per section 2(24)(x). However, if such contribution is actually paid on or before the due date the deduction will be allowed for the same under this clause.

Section 36(1)(vi) – Allowance in respect of Dead or Permanently useless Animals

Expenditure on the purchase of animals for the purpose of business or profession is a capital expenditure. However, there is no depreciation allowance on such capital expenditure.

Moreover, one has write off such capital expenditure as a loss in the year in which the animal dies or becomes permanently useless.

Further, deduction amount will be the cost of animal minus the proceeds of sale of the carcasses or the animals.

Section 36(1)(vii) – Bad debts written off

Deduction for bad debts 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 available for any provision for the bad debts.

Moreover, If the bad debt represents money lent then it is not available as deduction except if assessee has lent money in the ordinary course of the business of banking or money-lending.

Section 36(1)(viia) – Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks

Deduction for provision for bad debts is available to banks and financial institutions. Also, 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. Moreover, For banks that are incorporated outside India and other non banking financial institutions, the deduction will be limited to the extent of 5 percent of their gross total income

Section 36(1)(viii) – Transfer to Special Reserve

When any profit from eligible business is transferred to the reserve it can be claimed as a deduction. The amount allowed as a deduction is lower of the following.

  • 20% of the profit computed as per section 28 before deduction u/s 36(1)(viii)
  • Actual amount transferred to special reserve
  • 200% of (Paid-up capital+ General reserve) – Opening balance in special reserve

Further, Eligible business means Financial corporation engaged in providing long term finance (5 years or more) for industrial, agricultural, infrastructure and housing development companies.

Note : If any amount withdrawn from this reserve, one has to consider it as business income in the year of withdrawal.

Section 36(1)(ix) – Family Planning Expenditure

This expense is allowed as a deduction to the company, when such expenditure is capital in nature, in five equal annual installments. First installment is allowed in the year in which the expense is incurred. (For revenue expenses 100% deduction is allowed)

Section 36(1)(xv) – Securities Transaction Tax

Trader can claim the deduction of STT when shares/units/commodities are stock-in trade.

Section 36(1)(xvi) – Commodities Transaction Tax

A public financial institution can claim deduction for its contribution to notified credit guarantee trust for small industries(i.e. Credit Guarantee Fund Trust for Micro and Small Enterprises). Couldn’t find it online

Section 36(1)(xvii) – Expenditure by Co-Operative Society for purchase of Sugarcane

Cooperative society engaged in the business of manufacturing of sugar can claim the deduction for purchase of sugarcane at a price which is equal to or less than the price fixed by the government.

Section 36(1)(xviii) – Marked to Market Loss

Deduction is available for marked to market loss or any other expected loss as computed in the manner provided in ICDS (Income Computation & Disclosure Standards).

FAQs

What is Section 43B?

As per the income tax act, 1961 Section 43B states that certain payments can be claimed as an expense in the year of payment and not in the year of occurrence the liability.

Is deduction available for payment of health insurance premium for insurance of employees?

Yes, deduction is available for payment of health insurance premium for insurance of employees

Is deduction available for provision of bad debts?

No, deduction is not available for provision of bad debts.

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