Businesses, professionals, and even cooperative societies incur various costs in the course of running their operations. Section 36 of the Income Tax Act, 1961, lists specific expenses, including insurance premiums, employee bonuses, interest on loans, bad debts, and contributions to employee welfare funds that a taxpayer can deduct from their business or professional income while calculating taxable profits. These deductions are intended to provide relief for genuine business-related costs incurred during the financial year.
In this blog, we will understand the permissible deductions allowed under Section 36 of the Income Tax Act, 1961
List of Deductible Expenses under Section 36
1. Insurance Premium for stocks: If your business pays insurance to protect goods, stock-in-trade, or raw materials from fire, theft, or any other damage, then that premium is a deductible business expense.
2. An insurance premium paid on the life of cattle being livestock: The amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society;
3. Insurance premium paid by employer to employee: If you pay a premium for your employee’s health, accident, or term insurance policy, you can claim it as a deduction, provided the payment is not in cash.
4. Bonus, commission to employees: Bonuses or commissions paid to employees for their services are allowed as deductions, as long as they are genuine and not a way of distributing profits in disguise.
5. Interest on Loan: Interest paid on loans taken for business or professional purposes is allowed, whether the loan is from a bank, NBFC, or even a private lender. But if the loan is used for personal expenses, the interest cannot be claimed.
6. Discount on Zero Coupon Bonds: Businesses that issue zero-coupon bonds (bonds that don’t pay regular interest but are redeemed at a higher value) can deduct a portion of the discount every year till maturity.
What is a Zero-Coupon Bond?
A zero-coupon bond is a special type of loan instrument.
- It doesn’t pay regular interest like normal bonds.
- Instead, it is issued at a discounted price and repaid at its full face value when it matures.
7. Employer’s Contribution to Recognised PF or Superannuation Fund: Employers who contribute to employee retirement benefits like Recognised Provident Funds or Approved Superannuation Funds can deduct such payments.
8. Employer’s Contribution to Pension Scheme (NPS): If you contribute to an employee’s National Pension Scheme (NPS) account, the amount is deductible up to:
- 10% of their salary (basic + DA), or
- the actual amount paid,
- Whichever is lower.
9. Gratuity Fund Contribution: Any contribution made by an employer to an approved gratuity fund for the benefit of employees (under an irrevocable trust) is fully deductible.
10. Employee Contributions Collected (PF, ESI, etc.): If you collect money from employees for Provident Fund, ESI, or Superannuation Fund, you must deposit it before the due date. If not, that amount will be taxed as your income.
11. Loss from death or damage to business animals: If you use animals in your business (like a bullock in farming or a horse in transport), and they die or become permanently unfit, the loss (original cost minus any money recovered) is allowed as a deduction.
12. Bad debts written off: When a customer doesn’t pay you and the debt becomes irrecoverable, you can deduct that amount if:
- It relates to your business sales
- It is written off in your books in the same year
NOTE: Debts from loans are not allowed, except for licensed moneylenders.
13. Provision for bad debts (only for banks and NBFCs): Only certain financial institutions can claim a provision for future bad debts:
- Indian banks: 8.5% of Gross Total Income + 10% of rural branch advances
- Foreign banks and NBFCs: Up to 5% of Gross Total Income
14. Family planning expenditure (only for companies): Companies that spend on promoting family planning among employees can claim:
- 100% deduction for revenue expenses (like awareness programs),
- Capital expenses such as building a clinic are allowed in five equal instalments over 5 years.
15. Cost of Making Computers Y2K Compliant” If your business spent money in FY 1999–2000 to upgrade computers to handle the year 2000 problem (Y2K bug), that expense was deductible.
16. Government Corporations’ Statutory Expenditure: If a company or body was created under a Central or State Act, and it spends money for its authorised purposes, that expense is deductible only if approved by the government.
17. Banking Cash Transaction Tax (BCTT): If you paid this tax on high-value cash transactions (applicable only during specific years in the past), it is deductible
18. Contribution to Credit Guarantee Fund (By PFIs): Public Financial Institutions (PFIs) can deduct contributions made to Credit Guarantee Fund Trusts for small industries only if the government notifies such funds.
19. Securities Transaction Tax (STT): If your business involves trading in shares, the STT paid is deductible, but only if the income from that transaction is shown under “business income” and not as capital gains.
20. Commodities Transaction Tax (CTT): If you are trading in commodities (like gold, crude oil, etc.), the CTT paid is allowed as a deduction under the same condition, only if the income is business income.
21. Purchase of sugarcane (For Sugar Co-ops): Co-operative sugar factories can deduct the cost of purchasing sugarcane from farmers as long as the price doesn’t exceed what the government has fixed or approved.
22. Marked-to-Market (MTM) Losses: MTM losses refer to losses shown due to changing market value of assets (like derivatives). These are allowed only if calculated according to government rules (ICDS). If not, the deduction isn’t allowed.
Conclusion
Section 36 offers a wide variety of deductions to encourage responsible business spending, employee welfare, and financial discipline. These deductions:
- Reduce your taxable income, and
- Must be genuine, properly documented, and timely paid
Always check for:
- Deadlines (e.g., PF contributions),
- Approved institutions (e.g., PF funds, gratuity trusts), and
- Proper accounting (e.g., written-off bad debts)
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