Section 36 of the Income Tax Act: Deductions for Business Expenses
The Income Tax Act, 1961 provides several deductions to help taxpayers reduce their tax burden. Section 36 lists specific expenses that can be claimed as deductions from income earned through business or profession. Below are the types of expenses covered under this section.
Expenses Eligible for Deduction
Insurance Premium
The following insurance-related payments qualify for deduction:
- Premium paid to insure stock-in-trade against loss or damage. This is beneficial for businesses dealing with high-value inventory and higher risk, such as jewellers or traders.
- Premium paid by a Federal Milk Cooperative Society for insuring the lives of cattle owned by members of the primary societies that supply milk.
- Health insurance premium paid by an employer for employees, provided the payment is made through non-cash modes. The deduction is allowed when the premium is paid to a General Insurance Company or any IRDA-approved insurer.
Bonus or Commission to Employees
Bonus or commission given to employees for services they provide is deductible. However, this deduction is allowed only if the payment is not in the nature of dividends or distribution of profits. Incentives are not included here, but they may still be claimed under Section 37 as general business expenditure.
Interest on Borrowed Capital
Interest paid on funds borrowed for business or professional use is deductible on a payment basis. If the borrowed capital is used to acquire an asset, the interest for the period from borrowing until the asset is first put to use cannot be claimed as a deduction.
Discount on Zero Coupon Bonds (ZCB)
Businesses are allowed to claim a deduction for the discount on Zero Coupon Bonds. This discount is spread out and written off proportionately over the tenure of the bond.
Contribution to Recognised Provident Fund
An employer can claim a deduction for contributions made to a Recognised Provident Fund or a Superannuation Fund, but only on a payment basis. The deduction applies solely in the year the amount is actually paid, not on an accrual basis.
Contribution to National Pension System (NPS)
Employer contributions made to pension schemes specified under Section 80CCD, such as the National Pension System and Atal Pension Yojana, qualify for deduction. The allowable deduction is capped at 10% of the employee’s salary, where salary includes basic pay and dearness allowance but excludes allowances and perquisites.
Contribution to Approved Gratuity Fund
An employer’s payment to an approved gratuity fund for employee benefits is deductible on payment basis. Additionally, if employees contribute to the fund and the employer deposits these contributions within the prescribed due date, that amount is also eligible for deduction.
Contribution to Staff Welfare Schemes
Amounts collected by employers from employees as contributions toward PF, ESI, and similar welfare schemes qualify for deduction, provided they are deposited within the mandated deadline. If the employer fails to deposit the amount on time, it will be treated as taxable business income.
Allowance for Dead Animals Used in Business
When animals used in the business (but not held as stock-in-trade) die or become unusable, the deductible amount equals the purchase cost of the animal minus any amount recovered from its sale.
Bad Debts Written Off
Any bad debt, or a portion of it, that is written off in the accounts as irrecoverable during the financial year is deductible. The debt must be connected to the business and should have been considered while computing income. Provisions for bad debts are not eligible for deduction.
Provision for Bad Debts for Banks and Certain Financial Institutions
Banks and specified financial institutions are eligible for a deduction on provisions created for bad debts. The allowable deduction is as follows:
- For Indian scheduled banks, non-scheduled banks, and co-operative banks (excluding primary agricultural credit societies and primary cooperative agriculture and rural development banks):
A deduction of 8.5% of gross total income plus 10% of the aggregate average advances made by rural branches. - For foreign banks and other specified financial institutions:
A deduction of 5% of gross total income.
These calculations must be made before applying any deductions available under Chapter VI-A.
Transfer to Special Reserves
Certain entities, such as IDFC and Housing Finance Companies, can claim a deduction when profits from eligible businesses are transferred to a special reserve. The deduction is limited to the lower of:
- 20% of profits from the eligible business, or
- The amount transferred that exceeds twice the paid-up capital plus general reserves as per the opening balance of the special reserve.
Eligible business activities include providing long-term finance for industrial, agricultural, housing, and infrastructure development. If any amount from this reserve is later withdrawn, it will be taxed as business income in the year of withdrawal.
Expenses for Promoting Family Planning Among Employees
Companies can claim deductions for expenses incurred on family planning initiatives for employees. For capital expenditure, one-fifth of the amount is deductible in the year of expenditure, with the remaining amount spread equally over the next four years.
Expenses Incurred by Corporations
Corporations or statutory bodies formed under a Central, State, or Provincial Act can claim deductions for expenses incurred for the purposes authorized under the respective Act. However, capital expenditure is specifically excluded from deduction under this provision.
Banking Cash Transaction Tax
Any banking cash transaction tax paid by an assessee on taxable banking transactions is eligible for deduction.
Payment to Credit Guarantee Fund Trust for SSIs
Public financial institutions can claim a deduction for contributions made to the Credit Guarantee Fund Trust for Small-Scale Industries (SSIs).
Securities Transaction Tax (STT)
STT paid on taxable securities transactions carried out as part of business activities is deductible. The related income must be included under business income, and the transactions should arise in the normal course of business. This deduction is mainly relevant for stock market dealers and businesses engaged in trading.
Commodities Transaction Tax (CTT)
CTT paid on taxable commodities transactions undertaken in the course of business is allowed as a deduction. The corresponding income must be recorded as business income. This benefit applies to commodity brokers and dealers.
Expenditure by Co-operative Society for Purchase of Sugarcane
A co-operative society involved in sugar manufacturing can claim a deduction for the cost of sugarcane purchased, provided the payment does not exceed the price fixed by the Government.
Marked-to-Market Loss
Losses computed on a marked-to-market basis, in accordance with the Income Computation and Disclosure Standards (ICDS), are deductible. For example, mutual fund investments valued on a mark-to-market basis fall under this category.
Summary of Deductions Allowed Under Section 36
Below is a summary of the deductions available and the eligible assessees who can claim them:
| Deduction u/s 36 | Amount of Deduction | Eligible Assessee |
| Insurance premium on stock | Actual expenditure | Any assessee |
| Insurance premium on life of cattle | Actual expenditure | Federal milk co-operative society |
| Health insurance premium for employees | Actual expenditure | Any assessee |
| Bonus or commission to employees | Actual expenditure | Any assessee |
| Interest on borrowed capital | Actual expenditure | Any assessee |
| Discount on Zero Coupon Bonds | Pro-rata discount amount | Any assessee |
| Contribution to recognised PF or superannuation fund | Actual expenditure | Any assessee |
| Contribution to NPS | Up to 10% of employee’s salary | Any assessee |
| Contribution to approved gratuity fund | Actual expenditure | Any assessee |
| Contribution to staff welfare schemes | Actual amount deposited | Any assessee |
| Allowance for dead animals used in business | Cost minus sale value | Any assessee |
| Bad debts written off | Actual amount written off | Any assessee |
| Provision for bad debts – banks & financial institutions | Indian banks: 8.5% of GTI + 10% of rural advances; Foreign banks/others: 5% of GTI | Banks & financial institutions |
| Transfer to special reserves | 20% of profits from eligible business | Financial corporations, banks, housing finance companies, PSU companies |
| Family planning expenses | One-fifth of capital expenses yearly over 5 years | Companies |
| Expenses by corporations | Actual expenditure for authorised activities | Statutory corporations |
| Banking cash transaction tax | Actual expenditure | Any assessee |
| Contribution to credit guarantee fund trust | Actual expenditure | Public financial institutions |
| STT paid | Actual expenditure | Assessee engaged in securities trading |
| CTT paid | Actual expenditure | Assessee engaged in commodity trading |
| Purchase of sugarcane | Actual purchase cost | Sugar manufacturing co-operative societies |
| Marked-to-market losses | Actual loss | Any assessee |
FAQs on Section 36 Deductions Under the Income Tax Act (India)
1. Can insurance premiums paid on stock-in-trade be claimed as a deduction under Section 36?
Yes. Insurance premiums paid to safeguard stock-in-trade are fully deductible under Section 36(1)(i), as they are considered essential business expenses.
2. Are bonuses and commissions paid to employees deductible under Section 36?
Yes. Bonuses, incentives, and commissions paid to employees qualify for deduction under Section 36(1)(ii), provided they are genuine, approved, and not in lieu of profit distribution.
3. Is maintaining proper books of accounts necessary to claim deductions under Section 36?
Yes. To claim deductions, businesses must maintain proper books of accounts, supported by bills, vouchers, invoices, and valid proof of expenditure.
4. Is interest paid on income tax allowed as a deduction?
No. Interest, penalty, or late fees paid under the Income Tax Act are not allowable as business expenditure. These amounts are expressly disallowed while computing taxable profits.
5. What is the main objective of Section 36 of the Income Tax Act?
Section 36 specifies various permissible deductions that businesses can claim to reduce taxable income. These include insurance premiums, employee benefits, interest on loans, and other business-related expenses.
6. Can partnerships claim deduction for interest on partners’ capital under Section 36(1)(vi)?
Yes. Partnerships can claim a deduction for interest paid on partners’ capital, provided the capital is considered borrowed capital and is used strictly for business purposes. The interest must also be within limits specified in the partnership deed.
7. Can personal expenses during a business trip be claimed under Section 36?
No. Personal or private expenses incurred during a business trip are not deductible. Only costs incurred wholly and exclusively for business or professional purposes are eligible.
8. Is interest on business loans deductible under Section 36?
Yes. Interest paid on capital borrowed for business purposes qualifies for deduction under Section 36(1)(iii).
9. Can employers claim deduction for provident fund (PF) contributions under Section 36?
Yes. Employer contributions to PF, superannuation funds, and other recognised funds are deductible under Section 36(1)(iv) and 36(1)(v), provided they are deposited within the prescribed timelines.
10. Is bad debt written off allowed as a deduction?
Yes. Bad debts actually written off in the books during the financial year are deductible under Section 36(1)(vii), subject to certain conditions.
11. Can premium paid for keyman insurance policy be claimed as a deduction?
Yes. Premium paid on a Keyman Insurance Policy is allowed as a deduction u/s 36(1)(ib), as it is treated as a revenue expenditure.
12. Is salary paid to relatives deductible under Section 36?
Yes, provided the salary is reasonable, genuine, and paid for actual services rendered. Excessive payments may be disallowed.
13. Can expenditure on employee welfare be claimed under Section 36?
Yes. Expenses incurred for employee welfare—such as medical benefits, canteen services, or training—are deductible, provided they relate to employees and are not personal expenses.
14. Are contributions to gratuity funds deductible?
Yes. Contributions made by employers to an approved gratuity fund are deductible under Section 36(1)(v), subject to prescribed conditions.
