Know the Deductions Under Section 36 of the Income Tax Act

• Section 36 of the Income Tax Act includes a spectrum of deductions that businesses and professionals can claim to reduce their taxable income.
• The Income Tax Act. 1961 allows various deductions under Section 36. It includes interest on borrowed capital, depreciation, bad debts, insurance premiums, rent, rates, and taxes.
• The deductions apply to different types of taxpayers.
• Conditions for claiming the deductions under Section 36 of the Income Tax Act, 1961 are that the expense must be incurred to earn income.
• The expense must be actual and incurred during the previous year and should be supported by documentary evidence.

Section 36 of the Income Tax Act plays a crucial role in determining the taxable income of businesses and individuals in India. Understanding the deductions outlined in this section will help you manage your tax liabilities and financial planning strategies. Without further ado, let’s delve into the intricacies of section 36 of the Income Tax Act, 1961.

Section 36 of the Income Tax Act, 1961, of India, provides a framework for determining the taxable income of businesses and professionals. This section includes various provisions that allow deductions from your gross income.This article explores each deduction available under Section 36 in detail. Learn about their significance and the conditions for claiming them.

Section 36 of the Income Tax Act includes deductions that businesses and professionals can claim to reduce their taxable income. These deductions are designed to account for expenses incurred in the course of generating business income. It ensures a fair assessment of tax liability based on net profits after allowable expenditures. Also Read: E-Filing 2.0: New Income Tax E-filing Portal Explained

Section 36 of the Income Tax Act, of 1961 includes the following list of deductions on the income earned through any business or profession:

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

Interest paid on borrowed capital used for business purposes is deductible under Section 36(1)(iii). This includes interest on loans, overdrafts, debentures, or any other form of borrowed funds that you use to finance your business operations. Loans can be taken from banks, PFI, state financial corporations, and State industrial investment corporations.If you borrow capital from any acquisition of an asset, then interest on the borrowed amount will not be allowed or counted as a deduction till the date you put such asset to use.

Conditions for Deduction:

• The interest must be paid or payable on borrowed capital used for business or profession.
• The deduction is available on an accrual basis or when the interest is paid, depending on the method of accounting followed by the taxpayer.
• Interest related to personal loans or loans taken for non-business purposes does not qualify for deduction under this section.

2. Bad Debts (Section 36(1)(vii))

Section 36 (1)(vii) allows a deduction for bad debts that are written off as irrecoverable during the previous year. A bad debt is a debt that has become irrecoverable after being included in the income of the business. It includes:

• Any bad debts related to business
• The debt must have been included in the income of the taxpayer in an earlier year.
• The bad debt must be written off as irrecoverable in the books of accounts during the previous year.
• The taxpayer must demonstrate that reasonable efforts were made to recover the debt before writing it off.

3.Business Expenses (Section 36(1)(ix))

Section 36 (1)(ix) allows a deduction for various business expenses that are incurred wholly and exclusively for business or profession. These expenses are essential for the conduct of business operations and include:

• Rent for business premises
• Repairs and maintenance of business assets
• Insurance premiums related to business assets or liabilities
• Depreciation on tangible assets used in business
• Salaries, wages, and bonuses to employees
• Legal and professional fees directly related to business operations
• Advertisement and marketing expenses
• Travelling expenses for business purposes

Note: Capital expenditures and personal expenses are not allowed as deductions under this section.

4. Discount on a Zero-coupon Bond (Section 36(1)(iiia))

If you are someone who invests in zero-coupon bonds, then Section 36 (1)(iiia) of the Income Tax Act, 1961 is beneficial for you. It allows you to deduct the expenditure incurred in the form of a discount on such bonds, thereby reducing your taxable income. The pro-rata amount of discount will be amortised over the life of the ZCB.

5. Employer’s Contribution to Recognised Provident Fund (Section 36(1)(iv))

Section 36 (1)(iv) pertains to the deduction available for contributions made by an employer to a recognised provident fund or superannuation fund.

Key Points

• Recognition Requirement : Contributions must be made to a fund recognised under the Income Tax Act, regulated by the Employees' Provident Fund Organisation (EPFO).
• Nature of Deduction : Employer contributions to recognised provident funds are treated as allowable business expenses.
• Conditions : Contributions must be made during the relevant previous year to qualify for deduction.

6. Premium for Group Gratuity Scheme (Section 36(1)(v))

Employers can claim a deduction for premiums paid towards a group gratuity scheme for employees under Section 36 (1)(v). Gratuity is a statutory benefit payable to employees upon retirement or termination of employment.

Conditions for Deduction

• The premium must be paid to an approved gratuity fund or scheme under irrevocable trusts.
• The deduction is limited to the amount paid during the financial year.

7. Employee’s Contribution Towards Staff Welfare Schemes (Section 36(1)(VA))

Section 36 (1)(VA) encourages employees to participate in approved staff welfare schemes by offering a tax deduction for their contributions. It supports employee welfare initiatives while providing tax benefits within the framework of Indian tax laws. Contribution to PF (provident fund), superannuation funds, ESI (employees' state insurance), etc is included under this section.

8. Write off Animals Used in Business (Section 36(1)(vi))

Section 36 (1)(vi) allows a deduction for the write-off of animals that are used for business or professional purposes.

• Nature of Deduction: The deduction is available when animals, such as livestock or other creatures, are written off as irrecoverable or lost during business operations.
• Business Use: The animals must be used directly in the taxpayer's business or profession to qualify for the deduction.
• Conditions: The write-off must be supported by proper documentation and should be as per the taxpayer's method of accounting.

9. Provision for Bad Debts in Case of Banks and Certain Financial InstitutionsSection 36(1)(Vii A)

Here is an overview of the deductions under this section:

• In the case of Indian scheduled banks, non-scheduled banks or a co-operative bank - an amount equal to 8.5% of gross total income + 10% of aggregate average advances by rural branches shall be allowed as a deduction.
• 5 % of the gross total income for banks incorporated outside of India and other financial institutions.

Note: Income before this deduction and deduction u/s 80C to 80U.

10. Transfer to Special Reserve (Section 36(1)(viii))

Section 36 (1)(viii) allows a deduction for the amount transferred by any business to a special reserve.The deduction would be allowed when:

• A maximum of 20% of profits from eligible business is transferred
• A maximum of 200% of (Paid-up capital + General reserve) is transferred

11. Expense on Promoting Family Planning of Employees (Section 36(1)(ix))

When any company incur expenses to promote family planning for employees, it is allowed as a deduction under section 36 of the Income Tax Act. You must note that 1/5th of the amount is treated as a deduction. The amount should be of a capital nature. The remaining would be given over the succeeding 4 years.

12. Securities Transaction Tax(STT) / Commodities Transaction Tax (CTT) (Section 36(1)(xv) and (xvi))

When shares/units/goods are held as stock-in-trade, it passes as a deduction under section 36 of the Income Tax Act.

13. Contribution to Credit Guarantee Trust Fund (Section 36(1)(xiv))

Deductions allowed under section 36include contributions made by a public financial institution to a notified credit guarantee trust for small industries.

14. Expenditure by Co-operative Society for Purchase of Sugarcane (Section 36(1)(xvii))

Deductions allowed under section 36include expenditure by a cooperative society that is engaged in the manufacturing of sugar for the purchase of sugarcane. The price of sugarcane should be equal to or less than the price fixed by the Government of India.

15. Marked to Market Loss (Section 36(1)(xviii))

Under section 36 of the Income Tax Act,a marked-to-market loss is any loss computed in accordance with the Income Computation & Disclosure Standards.

You must be aware of the deductions that are provided by section 36 of the Income Tax Act , of 1961. It is equally important to check the conditions under which you can claim these deductions. Before making any of these claims, you must carry proper documentation that should adhere to the law laid down by the Government of India.By choosing these deductions, you can significantly reduce your tax liability and save your income.