Section 36- Other Deductions

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The Income Tax Act, of 1961 is the main statute of Income Tax in India. It provides for levy, administration, collection, and recovery of Income Tax.

According to Section 36 of the Income Tax Act, 1961,

It gives a list of explicit deductions for computing income arising from a profession or business.

List of deductions available under Section 36:

Deduction for insurance premium with respect to-

• risk to destruction or damage of stock in trade,

• the life of the cattle, and

• employees’ health insurance.

Bonus and commission payable to employees- It is only allowed as a deduction if it has not been paid as dividends or profits. This bonus need not be within the statutory limits specified under the Payment of Bonus Acts. It is sufficient if it is paid within the time limits. Incentives that are paid to employees are not covered in this section. But, since it is used for the purpose of Business or Profession, it can be claimed under the general deductions section under section 37.

Borrowed capital interest- Interest on the amount borrowed for business and profession is allowed as a deduction on payment basis. – If the interest is borrowed for the 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 Recognized Provident Fund or a Superannuation Fund- It 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 an accrual basis and is on a payment basis.

Employer’s contribution to pension fund specified under section 80CCD on behalf of his employees- This amount will 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.

Gratuity Fund- The employer’s contribution to an approved gratuity fund is deductible on a 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 are 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 the sale.

Bad debts are 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 will 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) Amount = 8.5% of gross total income + 10% of aggregate average advances by rural branches shall be allowed as a deduction

Special Reserve- The special reserve which is created by certain entities like, 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.

Also, if the amount transferred to this reserve is withdrawn, it will be treated as business income in the year of withdrawal.

Promoting Family Planning- Expenses incurred by a company for purpose of promoting family planning among employees are allowed as a deduction in the following manner:

1/5th of the amount which is of a capital nature is allowed in the year of deduction and the remaining over the succeeding 4 years.

Expenses that are not capital in nature- Any expenses which are not capital in nature and are incurred by a corporation or a body corporate (which is established by a Central or a State Act or notified in a Gazette)

Banking Cash Transaction- Amount of banking cash transaction tax paid by the assessee on taxable banking transactions.

Credit Guarantee Fund Trust- Contribution to credit guarantee fund trust of small-scale industries by a public financial institution.

Securities Transaction Tax- 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 present in the course of business. This means that dealers in stock markets and businesses who undertake to trade are eligible for this deduction.

Commodities Transaction Tax- 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.

Co-operative Society- 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.