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Section 36 of the Income Tax Act, 1961, comprises a list of specific deductions for computation of income from profession or business. Section 36 illustrates the various expenses that are allowed as a deduction from the business income earned.
The following expenses are allowed as deductions under Section 36 of the Income Tax Act, 1961:
Employer’s contribution to pension fund: The contribution (as specified under Section 80CCD of the Income Tax Act, 1961) is allowed as a deduction to the extent of 10% of the salary of the employees. Salary comprises of Dearness Allowance and does not include additional perquisites and allowances.
Employer’s contribution to a Gratuity Fund: The contribution is deductible on payment basis. This comprises of employees contribution deposited by the employer within a stipulated due date.
Animals: Animals used in business, but not for stock/trade or if they die/become useless. The following amount can be claimed for deduction: Cost of purchasing the animal subtracted by the amount realized on sale.
Bad Debts/Written off: All bad debts can be claimed for deductions if the bad debt is incidental to the business and has been taken into account while computing income. This does not include any provision created for the same.
Provision for bad debts in case of the following banks - scheduled banks, primary agriculture credit society, primary cooperative agriculture bank, rural development bank.
5% of the total gross income is allowed as a deduction for banks incorporated outside India and other financial institutions.
Note: The above amount is calculated on the basis of Chapter VI-A.
Cash: Banking cash transaction i.e. tax paid by an individual on taxable banking transaction. Credit Guarantee Fund Trust - Contribution made to a credit guarantee fund trust of small scale industries (public financial institution).
Securities Transaction Tax (STT): An amount paid as Securities Transaction Tax on taxable security transactions is eligible for deduction. The income related to this tax should be a part of business income. Dealers and traders in stock markets are eligible for this deduction.
Commodities Transaction Tax (CTT): An amount paid as Commodities Transaction Tax on taxable commodity transactions is eligible for deduction. The income related to this tax should be a part of business income. Dealers and commodity brokers are eligible for this deduction.
Sugarcane Industry: Expenditure incurred by a co-operative society manufacturing sugar. The expenditure should be incurred on purchasing sugar when the price paid is less than or equal to the price fixed by the government.
Market Loss: Losses computed as per Income Computation & Disclosure Standards (Ex. mutual funds in an investment which is marked to market).
How much percentage contribution (gratuity fund) is eligible for deduction?
There is no such specific percentage. Any sum remitted by an employer as a contribution towards a gratuity fund is eligible for tax deduction.
How are taxes collected by the government?
Taxes are collected by the government through the following means:
What is Rebate?
Any individual whose total income does not exceed Rs. 5 lakhs is entitled to claim rebate under Section 87A of the Income Tax Act, 1961. The rebate is available in the form of deduction from the tax liability. It is lower of 100% of income-tax liability or Rs. 12,500.
What is Surcharge?
Surcharge is an additional tax levied on the amount of income-tax. Currently, surcharge is levied at 10% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 50 lakhs, but doesn’t exceed Rs. 1 crore.
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