Deductions u/s 36 – An Overview

Budget 2021 update: In case the employee’s PF contribution was deducted but not deposited by the employer, it will not be allowed as a deduction for the employer.

Expenses allowable as deduction:

• Insurance– This includes insurance premium paid on the following:
  1. Stock– this can be claimed as a deduction for businessmen for whom stock-in-trade is of high value and the risk related to stock is high. For example, traders, jewelers etc.
  2. Cattle– this insurance premium is paid by a federal milk society on life of cattle.
  3. Health of employees– labor forms a significant part of business and many employees take an insurance on the health of their employees. This is allowed as a deduction if it is paid in any mode other than cash. The premium paid can be claimed as a deduction if it is paid to General Insurance Company or any other insurer approved by IRDA
  4. Payment of keyman insurance policy premium for a partner of a Firm, Directors of a company and other key personnel.
• Bonus and commission paid to employees– This sum is allowed as a deduction if it would not have been paid as dividend or profits. This bonus need not be within the statutory limits specified under Payment of Bonus Acts. It is sufficient if it paid within the time limits. Incentives paid to employees are not covered in this section. However, since it is used for the purpose of Business or Profession, it can be claimed under general deductions section u/s 37.
• Interest on borrowed capital– Interest on the amount borrowed for business and profession is allowed as a deduction on payment basis.
  • If the interest is borrowed for acquisition of an asset, the following rule applies: The interest paid in the above period will not be allowed as a deduction.
  • Discount on Zero Coupon Bonds (ZCB)- where the discount will be amortized over the life of the ZCB.
• Employer’s contribution to a Recognised Provident Fund or a Superannuation Fund is allowed as a deduction on payment basis i.e. only in the year in which it is actually paid. This deduction is not on the accrual basis and is on payment basis.
• Employer’s contribution to pension fund specified u/s 80CCD on behalf of his employees –  This amount shall be available as a deduction to the extent of 10% of the salary of the employees. Salary includes Dearness Allowance but excludes other perquisites and allowances.
• Employer’s contribution to an approved gratuity fund for benefit of his employees is deductible on payment basis. Likewise, when employees contribute to the gratuity fund and this contribution is deposited by the employer within the stipulated due date it can be claimed as a deduction.
• Animals used in business when they are not used as stock in trade and they die or become useless, the following amount can be claimed: Cost of buying the animal – amount realized on sale.
• Bad debts written off– This amount can be claimed if the bad debt is incidental to the business and should have been taken into account while computing income. But this shall not include provision created for the same.

Provision for bad debts in case of banks and certain financial institutions- in case of the following banks (scheduled banks, primary agriculture credit society, primary cooperative agriculture bank, rural development bank), An amount = 8.5% of gross total income + 10% of aggregate average advances by rural branches shall be allowed as a deduction. For banks incorporated outside India and other financial institutions, 5% of the gross total income shall be allowed as a deduction. The above amount shall be calculated before taking into account any deductions under Chapter VI-A

• Special reserve created by certain entities being, IDFC, Housing Finance Co. etc. and when any profit from an eligible business is transferred to the reserve, it can be claimed as a deduction. This amount of deduction is capped at a maximum of the following:
  • 20% of profits from eligible business
  • Amount transferred < 2 (paid-up capital + general reserves)
  • Eligible business for this purpose includes providing long-term finance for industrial, agricultural, infrastructure and housing development companies.

Further, if the amount transferred to this reserve is withdrawn, it shall be treated as business income in the year of withdrawal.

• Expenses incurred by a company for purpose of promoting family planning among employees is allowed as a deduction in the following manner:
  • 1/5th of the amount which is of capital nature is allowed in the year of deduction and the remaining over the succeeding 4 years.
• Any expenses which are not capital in nature and is incurred by a corporation or a body corporate (which is established by a Central or a State Act or notified in a Gazette)
• Amount of banking cash transaction tax paid by the assessee on taxable banking transaction.
• Contribution to credit guarantee fund trust of small-scale industries by a public financial institution.
• Amount paid as Securities Transaction Tax (STT) on taxable security transactions and the income relating to this tax should have been included as business income. These transactions must be entered into in the course of business. This means that dealers in stock markets and businesses who undertake trading are eligible for this deduction.
• Amount paid as Commodities Transaction Tax (CTT) on taxable commodity transactions and the income relating to this tax should have been included as business income. These transactions must be entered into in the course of business. This deduction is for commodity brokers and dealers.
• Amount of expenditure incurred by a co-operative society manufacturing sugar, in purchasing sugarcane when the price paid is less than or equal to the price fixed by the Government.
• Marked to market loss or other loss computed in accordance with Income Computation & Disclosure Standards (Ex. mutual funds is an investment which is marked to market).

Let us summarize the above provisions into the deductions that are available and the type of assessee who could avail those deductions.

Deduction u/s 36 of the Income Tax Act, 1961	Type of assessee (having income from business or profession) eligible for this deduction
Insurance premium on stock	Any assessee
Insurance premium on life of cattle	Federal milk co-operative society
Insurance premium on health of employees	Any assessee
Bonus or commission paid to employees	Any assessee
Interest on borrowed capital	Any assessee
Discount on ZCB	Any assessee
Contribution to a recognized provident fund or superannuation fund	Any assessee
Contribution to pension fund specified u/s 80CCD	Any assessee
Contribution to approved gratuity fund	Any assessee
Employees contribution to any welfare funds	Any assessee
Animals used in business which have died or become useless	Any assessee
Bad debts written off	Any assessee
Special bad debts provisions as per limits mentioned in clause (7)	Scheduled banks, non-scheduled banks, banks incorporated outside India, public financial institutions etc.
Special reserve created by specified entities	Financial corporation, banking company, housing finance company, public sector companies etc.
Expenses for promoting family planning	Assessee being a company
Expenditure referred to in clause (10)	Corporation or body corporate
Payment to credit guarantee fund trust	Public financial institutions
STT paid	Any assessee undertaking business of securities transactions
CTT paid	Any assessee undertaking business of commodity transactions
Expenses incurred for buying sugarcane	Co-operative society being a sugar manufacturer
Marked to market loss	Any assessee