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Section 36 of Income Tax Act: Expenses Allowed for Deduction

Updated on: Sep 27th, 2024

7 min read

The Income Tax Act, of 1961 allows various deductions for taxpayers to help them manage their tax liability better. Section 36 of the Income Tax Act illustrates various expenses that are allowed as a deduction from the income earned from business and profession. Let us look at what expenses are covered under this section.

Expenses Allowable as Deduction

Insurance premium payment

Insurance premium paid on the following are allowed as deduction:

Deduction on insurance premium paid to cover the risk of destruction and damage of stock in trade used for the purpose of business and profession. 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, jewellers etc.
Deduction on insurance premium paid by the Federal Milk Cooperative Society for the life of cattle owned by the members of the primary society supplying milk raised by its members.
Deduction for health insurance premium paid for employees by the employer. 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.

Bonus or commission paid to employees

The bonus and commission paid to the employee for the service rendered by them is allowed as deduction. However, this sum is allowed as a deduction if it would not have been paid as dividend or profits. 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

The interest paid on the amount borrowed for business and profession is allowed as a deduction on payment basis.If capital is borrowed to acquire an asset, the interest deduction on that borrowed amount will not be permitted from the time the loan is taken until the asset is put into use.

Discount on Zero Coupon Bonds (ZCB)

The discount on a ZCB will be allowed as a deduction for businesses. The pro-rata amount of discount will be amortized over the life of the ZCB.

Contribution to recognised provident fund

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.

Contribution to National Pension Fund (NPS)

Employer’s contribution to pension fund specified u/s 80CCD (National Pension Fund and Atal Pension Yojana) 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 (DA) but excludes other perquisites and allowances.

Contribution to approved gratuity fund

Employer’s contribution to an approved gratuity fund for the benefit of their 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.

Contribution to staff welfare schemes

Any amount received by employers from their employees as contributions towards PF, ESI, etc., is eligible for deductions. However, it is only applicable when the amount received is deposited in the respective welfare account within the due date. In case employers do not deposit the amount within the due date, the Income Tax Department will treat it as income from business/profession.

Allowances regarding dead animals used in business

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 as deduction:

Cost of buying the animal minus amount realized on sale.

Bad debts written off

The amount of any bad debt or part written off as irrecoverable in the accounts in the previous year is allowed as deduction. 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

Deduction for provision for bad debts is available to banks and financial institutions. The amount of deduction are as follows:

In case of the Indian scheduled banks or non-scheduled banks or a co-operative bank (except , primary agriculture credit society, primary cooperative agriculture and rural development bank) - an amount of 8.5% of gross total income + 10% of aggregate average advances by rural branches shall be allowed as a deduction.
In case of 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

Transfer to special reserves

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 exceed twice the amount of 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 for promoting family planning amongst employees

Expenses incurred by a company for the purpose of promoting family planning among employees is allowed as a deduction as follows:

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.

Expenses incurred by corporation

Any expenses incurred by a corporation or a body corporate established under a Central, State or Provincial Act for the objects and purposes authorized by the respective Act is allowed as deduction. However, expenses incurred in the nature of capital expenditure are not allowed as deduction.

Banking cash transaction tax

Amount of banking cash transaction tax paid by the assessee on taxable banking transactions is allowed as deduction.

Payment to credit guarantee fund trust for SSIs

Any amount paid by a public financial institution as contribution to credit guarantee fund trust for Small-Scale Industries (SSIs) are allowed as deductions.

Amount paid as Securities Transaction Tax (STT)

Any Securities Transaction Tax (STT) paid in respect of the taxable securities transactions entered into in the course of business is allowed as deduction. The amount paid as 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)

Any Commodities Transaction Tax (CTT) paid in respect of the taxable commodities transactions entered into in the course of business is allowed as deduction. The amount paid as 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.

Expenditure incurred by co-operative society for purchase of sugarcane

The amount of expenditure incurred by a co-operative society manufacturing sugar for purchasing sugarcane is allowed as deduction when the price paid is less than or equal to the price fixed by the Government.

Marked to market loss

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).

Summary of deductions allowed under Section 36

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	Amount of deduction	Type of assessee (having income from business or profession) eligible for this deduction
Insurance premium payment on stock	Actual expenditure incurred	Any assessee
Insurance premium on life of cattle	Actual expenditure incurred	Federal milk co-operative society
Insurance premium on health of employees	Actual expenditure incurred	Any assessee
Bonus or commission paid to employees	Actual expenditure incurred	Any assessee
Interest on borrowed capital	Actual expenditure incurred	Any assessee
Discount on ZCB	Pro-rata amount of discount on zero coupon bonds	Any assessee
Contribution to a recognized provident fund or superannuation fund	Actual expenditure incurred	Any assessee
Contribution to NPS	Actual expenditure not exceeding 10% of the salary of the employee	Any assessee
Contribution to approved gratuity fund	Actual expenditure incurred	Any assessee
Contribution to staff welfare schemes	Actual amount received if credited to the employee’s account	Any assessee
Allowances regarding dead animals used in business	Cost of buying the animal minus amount realized on sale	Any assessee
Bad debts written off	Actual bad debts which have been written off from books of accounts	Any assessee
Provision for bad debts in case of banks and certain financial institutions	Indian scheduled banks, non-scheduled or a co-operative banks - 8.5% of gross total income + 10% of aggregate average advances Foreign banks and other financial institutions - 5% of the gross total income	Scheduled banks, non-scheduled banks, banks incorporated outside India, public financial institutions, etc.
Transfer to special reserves	20% of profits derived from eligible business	Financial corporation, banking company, housing finance company, public sector companies etc.
Expenses for promoting family planning amongst employees	1/5th of the amount which is of capital nature in the year of deduction and the remaining over the succeeding 4 years	Assessee being a company
Expenses incurred by corporation	Actual expenditure incurred for the authorised objects and purposes	Corporation or body corporate established under a Central, State or Provincial Act
Banking cash transaction tax	Actual expenditure incurred	Any assessee
Payment to credit guarantee fund trust	Actual expenditure incurred	Public financial institutions
STT paid	Actual expenditure incurred	Any assessee undertaking business of securities transactions
CTT paid	Actual expenditure incurred	Any assessee undertaking business of commodity transactions
Expenses incurred for buying sugarcane	Actual purchase price of sugarcane	Co-operative society being a sugar manufacturer
Marked to market loss	Actual losses incurred	Any assessee

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Frequently Asked Questions

What is the purpose of Section 36 in the Income Tax Act?

Section 36 aims to provide tax relief to businesses by allowing deductions on various expenses incurred in a financial year related to the business.

Can insurance premiums paid on stock in trade be claimed as a deduction under Section 36?

Yes, premiums paid on stock in trade are deductible under Section 36(1)(i).

Is the premium paid by the Federal Milk Co-operative Society for cattle insurable under Section 36?

Yes, such premiums are covered under Section 36(1)(a).

Can bonuses and commissions to employees be deducted under Section 36?

Yes, bonuses and commissions are deductible under Section 36(1)(ii) subject to certain conditions.

Can the entire amount of interest paid on borrowed capital be claimed as a deduction under Section 36?

No, only the interest paid on borrowed capital to the extent it is used for business or profession can be claimed as a deduction under Section 36.

Is it necessary to maintain proper books of accounts to claim deductions under Section 36?

Yes, it is necessary to maintain proper books of accounts to claim deductions under Section 36. The expenses claimed as deductions should be supported by proper bills, vouchers, and receipts.

Can a taxpayer claim a deduction for expenses incurred for personal use while on a business trip?

No, expenses incurred for personal use while on a business trip cannot be claimed as a deduction under Section 36. Only expenses incurred wholly and exclusively for the purpose of business or profession can be claimed as a deduction.

Is interest on income tax disallowed?

As per the provisions of income tax any amount paid in the form of interest/ penalty shall be disallowed. Thus, cannot be claimed as expense while filing Income Tax Returns.

Quick Summary

The Income Tax Act, 1961 allows various deductions including insurance premiums, bonuses, interest on borrowed capital, and contributions to funds. Provisions cover bad debts, welfare schemes, and expenses for family planning. The Act also permits deductions for entities like cooperative societies and corporations, including losses based on Income Computation & Disclosure Standards. Deductions vary by the type of expense and applicable assessee.