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In our previous article, we discussed what kinds of deductions are available from income derived from business or profession. In this article, we shall look at what expenses are deductible only on actual payment being made. We can also say that deduction is on payment and not on the accrual basis.

But, the assessee will be given time to pay these amounts before he files his return of income or the due date for filing his return of income. When filing the returns, the assessee can show the proof of making such payment and claim the deduction in the same year (in which the amount was accrued).

For example, Mr. A, an employer, has paid the provident fund (PF) that is due to be paid by him to his employees in the month of August 2018. This amount of PF pertains to the month of March 2018. In this case, he can claim this deduction for the year ending March 2018 itself by showing a proof of this while filing his return in September 2018. If Mr. A pays this amount in October 2018, this deduction will be available for the year ending March 2019.

The following deductions are specified in this section:

  1. Any tax, duty, cess or fee paid under any law in force is allowed as a deduction when it is paid- this includes GST, customs duty or any other taxes or cesses paid. Interest paid on these taxes are also eligible for deduction.
  2. Contribution to any recognized employee’s benefit fund: contribution by the employer to any employee’s benefit fund namely PF fund, superannuation fund, gratuity fund before the due date for depositing those funds or before the due date of filing income tax returns
  3. Bonus or commission payable to employees- this amount should be the actual bonus/ commission paid to employees and not dividends payable to them as shareholders.
  4. Interest on borrowings from Public Financial Institutions or State Financial Corporation in accordance with the conditions governing such loan
  5. Interest on loans and advances from Scheduled Bank in accordance with the conditions governing such loan
  6. Leave encashment provided by an employer to his employees
  7. Payment to Indian Railways

When the interests mentioned in the clause 4 and 5 have been converted into a loan, then such conversion does not amount to payment of interest which is deductible.

Therefore, for any person having income from business or profession maintaining his accounts on mercantile basis, it is important to know the above provisions, otherwise, he may not be entitled to these deductions.

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