Business owners and professionals can claim various expenses as income tax deductions. These expenses include paying employee benefits, interest payment for loans, etc. Section 43B of the Income Tax Act states that you can deduct these expenses from your taxable income but only in the year of actual payment.
To find out more about this section, keep reading!
Section 43B provides a list of expenses you can claim as deductions under the head ‘profits and gains of business or profession.’ However, you can claim these against your taxable income only in the year of actual payment. You cannot get the deductions in the year when you incurred the liability to pay such expenses under Section 43B.
Assesses can claim these deductions on payment and not on an accrual basis. He/she will be given time to pay these amounts before filing returns of income. When filing income tax returns, taxpayers need to show proof of payment to claim deductions in the same assessment year.
You can claim specific deductions under section 43B regardless of the year when liability was incurred according to the accounting method employed.
Let us look at the following example to see how Section 43B of the Income Tax Act works:
Mr Sharma is the owner of a professional advisory firm and has paid Provident Fund (PF) contributions due for his employees in July 2021. The amount is for March 2021. In such a case, he can claim this amount as an expense in the month of March 2021.
To get a deduction under Section 43B for the expense, he has to file an income tax return (ITR) in September 2021 for the year ending March 2021 by showing proof of payment. Had Mr. Sharma paid this amount in November 2021, he could have claimed the amount as a deduction for FY 2021-22. He would have to furnish the proof of payment when filing ITR next year.
Business owners can get deductions for taxes, duties, cess or any other taxes they have paid to the government. GST, customs duty and interest on these taxes are also eligible for deduction.
Bonus/commission to employees
Employers can get tax deductions for any bonus or commission they have paid to employees. Such a sum should not be payable in ordinary circumstances as profits or dividends.
Contribution to employee welfare
This includes any contribution made by the employer towards any recognised employee’s welfare fund such as provident fund, gratuity fund or superannuation fund.
Leave encashment provided by the employer can also be deducted under section 43B of the Income Tax Act.
Only the sum payable to Indian Railways for transport is deductible.
Borrowings or advances from banks
Business owners can get deductions for the interest they have paid for loans or advances to any scheduled commercial bank or cooperative bank. This excludes rural development banks, primary agricultural credit society or primary cooperative agricultural banks.
Borrowings from public institutions
This includes interest paid on any loan taken from a state financial corporation, public financial institution or state investment corporation.
Given below are the illustrations of deductions applicable under section 43B of ITA:
Suppose a company called Trimurti Limited has taken a loan from a scheduled bank as per applicable terms and conditions. Now it has to pay an interest on the loan for the month of March 2021. The company will pay the interest on May 7 2021. The payment is made before the due date of filing ITR. Therefore, the company can claim a deduction for the payable interest against the loan.
If Trimurti Limited pays the interest after the due date of filing ITR, they cannot claim deductions for the interest payable on the loan.
The following expenses are not allowed under section 43B of ITA:
Enumerated below are some of the important benefits:
Taxpayers can deduct expenses under the accrual accounting system if they fulfil these conditions:
Section 43B of the Income Tax Act allows deductions of various expenses for businesses and professionals. One can claim these deductions only in the year of actual payment and not when they are liable.
Ans: Yes, it is possible to claim Section 43B expenditure on an advance payment. As per the provisions under section 43B, one can claim deductions for advance payment of tax, EPF etc.
Ans: No, TDS is not considered as a business expense. Section 43B of ITA provides the details of the expenses covered. As per its provisions, TDS is a tax.
Ans: In case you make a payment covered under section 43B in advance, you can claim it in the year that you paid the sum. For inadmissible items of expenditure, you can claim it in any year. However, you will have to make the payment for such items in the same year.
Ans: Previously, Clause b allowed deductions for an employer’s contribution to employee benefit funds if he/she paid the amount before the due date of contribution. Now, employers can claim this only if they deposit the amount within the date of filing under section 139.
Ans: Assesses must add employees’ contributions as income because they debit the employer’s contribution to a profit and loss account. However, they do not add an employee’s contribution to this account and treat it as liabilities. This is why an employee’s contribution falls under business income under section 2 (24).
Ans: Previously, deductions were applicable on interest on loans if the assessee restructured the interest into a loan (a concept called Funded Interest Term Loan). To prevent this practice, the government amended Section 43B. Now, interest converted into a loan is not considered an ‘actual payment’.
Ans: Here are some of the incomes that Section 28 includes,
Profits and gains in last year
Compensations and other payments for persons managing a business
Income from trade, profession or other services
Cash assistance under GOI (Government of India)
Interest, salary, bonus or commissions that a partner of a firm receives
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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.
|Section 145A||Section 80P||Section 92CD|
|Section 281||Section 32(2)||Section 270A|
|Section 1399||Section 192A||Section 11|
|Section 35AD||Section 80C||Section 32|
|Section 206AA||Section 92E||Section 9|
|Section 153||Section 10(10D)||Section 194DA|
|Section 10AA||Section 80GG||Section 80TTB|
|Section 80JJAA||Section 1940||Section 23B|
|Section 206AB||Section 44AB||Section 87A|
|Section 115JB||Section 154||Section 194D|
|Section 194J(1)(ba)||Sectio 80U||Section 194K|
|Section 56-59||Section 80TTA||Section 234C|
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