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Section 36 Deductions - Income Tax Act

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.

Expenses allowed as deduction

The following expenses are allowed as deductions under Section 36 of the Income Tax Act, 1961:

  • Insurance Premium: Insurance premium paid towards Stock, Cattle and Health of Employees.
  1. Stock - Businessmen who trade stock of high value can claim such a deduction on the insurance premium. This is applicable to traders and jewellers.
  2. Cattle - Cattle includes cows, bulls, oxen, calves and other common types of large domesticated animals. Insurance premium paid by a federal milk society on life of cattle can be included for deduction.
  3. Health of Employees - Employers purchasing group health cover for their employees are eligible for deduction. The premium is allowed as a deduction only if it is paid via electronic mode or cheque.
  • Bonus and commission paid to employees: Bonus/commission which is not paid in the form of dividend or profit is allowed as a deduction. This does not include incentives paid to the employees and can be claimed under general deductions under Section 37. Interest on Borrowed Capital - Interest on the amount borrowed for business/profession is allowed for deduction only if:
  1. The interest is borrowed for acquisition of an asset subject to a time frame (date of borrowing the asset to date of putting the asset to use).
  2. Discount on Zero Coupon Bonds where the discount will be amortized over the life of the bond. Employer’s contribution to a Superannuation Fund or a Recognized Provident Fund - The contribution is allowed as a deduction on payment basis. It is applicable only in the year in which it is actually paid and not on an accrual basis.
  • 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.

  1. An amount equal to 8.5% of gross total income plus 10% of aggregate average advances by rural branches is allowed as deduction.
  2. 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.

  • Special Reserve: When the profit from an eligible business is transferred to a special reserve, it is eligible for deduction. This eligible amount is:
  1. 20% of profits
  2. Amount transferred < 2 (paid-up capital + general reserves).
  3. Eligible business for this purpose includes providing long-term finance for industrial, agricultural, infrastructure and housing development companies.
  • Family Planning: Expenses incurred by a company for the purpose of promoting family planning among employees is eligible for deduction. The deduction will be:
  1. 1/5th of the amount which is of capital nature is allowed in the year of deduction and the remaining over the succeeding 4 years. Corporate Expenses - These expenses (not capital in nature) are incurred by a corporate established by a Central or State Act/Notified Gazette.
  • 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).

Frequently Asked Questions

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:

  1. Tax Deducted at Source
  2. Tax Collected at Source
  3. Voluntary Tax paid by individuals - Advance Tax, Self - Assessment Tax.
  4. Income Tax

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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