Section 36 of Income Tax Act: A Detailed Guide
The Income Tax Act, of 1961 allows several deductions for taxpayers which help them to manage their tax liability better. Section 36 of the Income Tax Act allows persons to claim certain expenses incurred during the course of any business or profession as a deduction.
Taxpayers can claim such tax benefits while computing their income from businesses or professions. In order to know which expenses are liable for deductions, read on!
Expenses Allowable as Deductions under Section 36 of the Income Tax Act
Here is a list of expenses that one can claim as deductions:
- Section 36(1)(i)
An insurance premium paid by business houses or professionals with respect to insurance of stock in trade, lives of cattle, and health of employees. This Section is further explained below:
- Section 36(1)(i): This includes deductions for the premium paid against the risk of damage to stock in trade.
- Section 36(1)(a): Premium paid by Federal Milk Co-operative Society against the life of cattle which are owned by individuals or members of primary societies and those supplying milk to FMCS. Businesses can show this premium as expenses and claim necessary deductions.
- Section 36(1)(ib): Premium paid by professionals or businesses for health insurance of employees working under them. The amount is eligible for deduction claims if it is paid in any mode except cash.
- Section 36(1)(ii): Commissions and bonuses paid to employees
Businesses and professionals paying commissions and bonuses to their employees for rendering services can claim such expenses as deductions. A voluntary and statutory bonus also comes under this Section, and these deductions can only be claimed in the year in which payments were made.
However, these payments must satisfy two conditions:
- First, bonuses or commissions must be according to Section 43B of the Income Tax Act.
- These payments must be for rendering services and not in lieu of dividends.
- Section 36(1)(iii): Interest paid on loans borrowed for business purposes
Interest paid on capital borrowed by business owners and professionals is also eligible as deductions under this Section. The loans must adhere to conditions mentioned in Section 43B of the Income Tax Act and must be borrowed from banks, private finance initiatives, and state finance corporations.
However, when loans are taken to purchase any capital asset, interest paid on them from the date of purchase till the date on which they are put to use is not considered a deduction.
- Section 36(1)(iiia): Zero coupon bonds
Discount under zero coupon bonds is also eligible for deductions for businesses. However, entities must amortise pro-rata discount amounts over the life span of zero coupon bonds.
- Section 36(1)(iv): Employer’s contribution towards provident fund
Contribution made by employers to Employees’ Provident Fund (EPF) or superannuation fund is also eligible for claiming as deductions under the relevant Section of Income Tax Act. Entities can claim these contributions as deductions only in the year in which the payments were made.
- Section 36(1)(iva): Employer’s contribution towards the pension fund
Contributions made by employers to the pension fund as specified under Section 80CCD of the Income Tax Act are eligible for deduction. The tax benefit is available for up to 10% of the total salary of employees. The salary component includes only DA, and excludes other allowances.
- Section (36)(v): Employer’s contribution towards gratuity fund
Deduction is available on contributions made by employers towards the gratuity fund set up by them for the welfare of the employees under irrevocable trust. The gratuity fund must adhere to provisions mentioned in Section 43B of the Income Tax Act.
- Section 36(1)(va): Amount paid by employees towards welfare schemes
Any amount received by employers from their employees as contributions towards ESI, PF, etc., is eligible for deductions. This 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 same within the due date, the Income Tax Department will treat the same as income from business/profession.
- Section 36(1)(vi): Allowance with regard to dead/permanently useless animals
Expenditure incurred on the purchase of any animal for business reasons comes under capital expenditures. The tax authorities do not allow depreciation on these expenses. Entities can write off the respective capital expenditures incurred on such animals once the animal dies or is of no use.
Section 36(1)(vi) allows deductions which entities can compute as the cost of purchase of animals minus sale proceeds of animals or their carcass.
- Section 36(1)(vii): Bad debt written off
Entities writing off bad debt can claim the amount as a deduction only when the amount is connected with running businesses or professions. Entities must have considered bad debt while calculating their income.
A provision for bad debt can be claimed as a deduction when the entity concerned is in the lending business.
- Section 36(1)(viii): Any transfer made to a special reserve
Any transfer of profit by certain businesses to their reserves is eligible for deduction. Amount taken as a deduction will be lower of the following:
- Amount transferred to the special reserve.
- 20% of computed profit as per Section 28 before deductions under Section 36(1)(viii) of the IT Act
- 200% of (General reserve + paid-up capital) – the Opening balance of the special reserve account.
- Section 36(1)(ix): Expenses incurred on promotional activities
Expenditure on promoting family planning among employees is also eligible as a deduction. Deductions must be claimed in five equal instalments, and tax authorities consider the first instalment in the year in which such expense took place.
- Section 36(1)(xv) and 36(1)(xvi): Expenses on STT/CTT
Whenever an entity holds shares/commodities/units as their stock-in-trade, STT and CTT on them are eligible for deductions.
- Section 36(1)(xiv): Amount paid towards credit guarantee trust fund
Public financial institutions can claim contributions made towards credit guarantee funds for small and micro enterprises as deductions.
- Section 36(1)(xvii): Expenses incurred for the purchase of sugarcanes
Any co-operative society incurring expenditure while purchasing sugarcane for manufacturing sugar at a price equal to or less than the price fixed by the government is also eligible for deductions.
- Section 36(1)(xviii): Marked to Market Losses
Marked to market losses or any presumptive loss covered under the ICDS form is available as a deduction for business owners and professionals.
Also Read: Section 80GG – Eligibility & Steps To Claim Deduction For Rent Paid Under Section 80GG
Final Word
Section 36 of the Income Tax Act allows businesses and professionals to reduce their tax liability by claiming expenses incurred by them while carrying out their operations as deductions. Taxpayers must carefully go through each subsection and claim deductions according to prescribed provisions.
Also Read: What is Section 80D of Income Tax Act: Deductions for Medical & Health Insurance
FAQs on Section 36 of the Income Tax Act
Ans: According to this Section, taxpayers can claim certain expenses as deductions only in the year in which the payments were actually made. IT Department does not allow deductions in the year in which liability occurred.
Ans: Expenses not covered under Sections 30 to 36 and which incur during the course of business are allowed as deductions. Persons can claim such tax benefits to reduce their tax liability.
Ans: Corporations or a body corporate established by a state government or Central Government and notified in the official gazette can claim expenses related to the promotion of family planning among their employees. These expenses are not of a capital nature and come under eligible deductions as per Section 36 of the Income Tax Act.
Ans: Section 36(1)(viia) deals with deduction against the provision for bad debt of rural branches of commercial banks. The deduction amount will be equal to 8.50% of the total gross advances plus 10% of aggregate advances given by the rural branches.
Ans: Banks incorporated outside Indian territory can also claim provision for bad debts as a deduction u/s 36. However, this is limited to 5% of their total gross income in the preceding financial year.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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