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Deductions u/s 36: Expenses Allowed For Deduction

Updated on: 16 Jan, 2024 05:49 PM

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While calculating the profit or loss from the business and profession head, there are lists of expenses which are allowed as deduction from the income to arrive at the amount of income chargeable to tax. Here, we will explain the expenses covered under section 36 of the income tax act.

What is Section 36 of the Income Tax?

Section 36 of the Income Tax Act deals with the list of specific expenses which are allowed for the purpose of computation of income chargeable to tax under the business and profession head of income.

Which expenses are covered u/s 36 of income tax?

Section 36 of the income tax act 1961 contains the list of deductions from income earned through the business or profession.

Here is the list of expenses allowed as deduction.

  1. Insurance Premium deduction in respect of risk of damage or destruction of stock in trade, life of the cattle and health insurance of employees.
    Section 36(1)(i) Insurance premium against the risk of damage and destruction of stock in trade, used for the purpose of Business & Profession of the assessee shall be allowed as deduction.
    Section 36(1)(ia) Insurance premium paid by Federal Milk Cooperative Society for the life of cattle owned by the members to primary society supplying milk to it.
    Section 36(1)(ib) Health insurance premium of employees. Deduction will be allowed for the premium paid by any mode other than cash by the employer to effect or keep in force an insurance on the health of the employees under the scheme framed by the General Insurance Corporation of India or any other approved insurer.
  2. Section 36(1)(ii) : Bonus or commission paid to employees for services rendered
    Bonus whether statutory bonus or voluntary bonus, shall be allowed as deduction in the year of payment as per the provisions of the law
    - Subject to provisions of section 43B.
    - The same should not be paid in lieu of dividends or profits.
  3. Section 36(1)(iii) : Interest on borrowed capital
    The amount of interest paid in respect of capital borrowed for the purpose of Business & Profession of assessee shall be allowed subject to the section 43B. When the capital is borrowed for acquisition of a capital asset, then interest liability pertaining to the period till the date such asset is put to use shall not be allowed as deduction. Interest on borrowed capital
  4. Section 36(1)(iiia) : Discount on a zero-coupon bond
    Pro-rata amount of discount will be amortized over the life (calendar months) of the zero-coupon bonds.
  5. Section 36(1)(iv) : Employer’s contribution to recognized provident fund or a superannuation fund
    This is allowed as a deduction subject to limits laid down for the purpose of recognizing the provident fund or approved superannuation fund, on the payment basis i.e only in the year when it is actually paid by the employer.
  6. Section 36(1)(iva) : Employer contribution towards pension fund as referred to section 80CCD (Subject to section 43B)
    This amount is available as a deduction to the extent of
    - 10% of the salary of the employee or
    - Actual contribution,
    whichever is lower.
    Here salary means basic pay and dearness allowance (terms of employment provides).
  7. Section 36(1)(v) : Employer contribution towards approved gratuity fund
    The amount paid towards the approved gratuity fund created by him exclusively for the benefit of his employees under an irrevocable trusts is allowed as deduction subject to the provisions of section 43B.
  8. Section 36(1)(va) : Employee’s contribution towards staff welfare schemes
    Deduction for any sum received by the employer from his employees as contribution to PF, superannuation fund, ESI etc, (such contributions is deemed to be profit and gains from business and profession if such sum is not deposited in the respective fund by the due date of such fund) only when such sum is deposited in the respective welfare account on or before the due date.
  9. Section 36(1)(vi) : Write off animals used in business
    When animals which are used for the purpose of business or profession(not as stock-in-trade) have died or became permanently useless, then deduction is allowed in the year in which such animal becomes permanently useless.
    Deduction amount = Cost of animal -Scrap Value
  10. Section 36(1)(vii) : Bad Debts written off
    Amount of debt or any part thereof is allowed as deduction when
    - Bad debts are related to business and and should be written off in the books of accounts
    - They must have been taken into account while computing income of previous year or earlier previous year. Interest on borrowed capital
  11. Section 36(1)(viia) :Deduction in case of provision for bad debts in case of banks and certain financial institution
    - The amount of deduction is given below :
    - For Indian Banks an amount equal to 8.5% of gross total income + 10% of aggregate average advances made by rural branches shall be allowed as a deduction.
    For banks incorporated outside India and other financial institutions 5% of the gross total income shall be allowed as a deduction.
    Amount deductible in case of bad and doubtful debts
    Scheduled & Non- Scheduled Banks  Public financial institution(PFI), state financial corporation(SFC), state industrial investment corporation Foreign Bank Non-Banking Financial Corporation(NBFC)
    Upto AY 2017-18 From AY 2018-19
    Total Income Percentage* 7.5% 8.5% 5% 5% 5%
    Aggregate Avg Advances made by rural branches 10% 10% - - -

    *Income before this deduction and deduction u/s 80C to 80U.

  12. Section 36(1)(viii) : Transfer to special reserve
    When any profit from eligible business is transferred to the reserve it can be claimed as a deduction. The amount allowed as a deduction is lower than the following.
    - 20% of the profit computed as per section 28 before deduction u/s 36(1)(viii)
    - Actual amount transferred to special reserve
    - 200% of (Paid-up capital+ General reserve) - Opening balance in special reserve
    Eligible business means Financial corporation engaged in providing long term finance (5 years or more) for industrial, agricultural, infrastructure and housing development companies.
    Note : Any amount withdrawn from this reserve shall be treated as business income in the year of withdrawal.
  13. Section 36(1)(ix): Expense on promoting family planning of employees
    This expense is allowed as a deduction to the company , when such expenditure is capital in nature, in five equal annual installments. First installment is allowed in the year in which the expense is incurred. (For revenue expenses 100% deduction is allowed)
  14. Section 36(1)(xv) and (xvi) : Securities Transaction Tax(STT) / Commodities Transaction Tax(CTT)
    It is allowed as deduction when shares/units/commodities are held as stock-in trade.
  15. Section 36(1)(xiv ) : Contribution to credit guarantee trust fund
    A public financial institution can claim deduction for its contribution to notified credit guarantee trust for small industries(i.e. Credit Guarantee Fund Trust for Micro and Small Enterprises). Couldn't find it online
  16. Section 36(1)(xvii) : Expenditure by co-operative society for purchase of sugarcane
    Expenditure incurred by cooperative society engaged in the business of manufacturing of sugar for purchase of sugarcane at a price which is equal to or less than the price fixed by the government is allowed as deduction.
  17. Section 36(1)(xviii) : Marked to Market Loss
    Marked to market loss or any other expected loss as computed in the manner provided in ICDS(Income Computation & Disclosure Standards) shall be allowed as deduction.

Frequently Asked Questions (FAQs)

Q - Is interest on income tax disallowed?

As per the provisions of income tax any amount paid in the form of interest/ penalty shall be disallowed. Thus, cannot be claimed as expense while filing Income Tax Returns.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.