Important Keyword: Section 36, Section 36(1)(i), Section 36(1)(ii), Section 36(1)(iii), Section 36(1)(iv), Section 36(1)(v), Section 36(1)(vi), Section 36(1)(vii), Income from Business & Profession, Income Tax Act, Insurance Premium.

Section 36 of the Income Tax Act

Section 36 of the Income Tax Act outlines specific expenses that are permissible for computation of income taxable under the head of business and profession. These allowable deductions play a crucial role in determining the net taxable income of businesses and professionals.

Under Section 36(1)(i) of the Income Tax Act, businesses and professionals are eligible to claim deductions for insurance premiums paid across three distinct categories:

Section 36(1)(i) – Insurance Premium

1. Risk of Damage or Destruction of Stock-in-Trade:
   • This deduction pertains to insurance premiums paid to protect stock-in-trade against damage or destruction. It allows businesses to safeguard their inventory from unforeseen events such as fire, theft, or natural disasters.
2. Life Insurance Premium for Cattle:
   • Deductions are allowed for insurance premiums paid to insure the lives of cattle owned by the taxpayer. This provision aims to support agricultural and livestock-related activities by providing financial protection against risks associated with cattle farming.
3. Health Insurance Premium for Employees:
   • Employers can claim deductions for premiums paid towards health insurance coverage for their employees. This encourages businesses to prioritize the well-being of their workforce by providing access to healthcare benefits.

Section 36(1)(ii) – Bonus or Commission to Employees:

Businesses can claim deductions for statutory or voluntary bonuses paid to employees in the year of payment, subject to the provisions of section 43B. This deduction is allowable if the bonus is not in lieu of dividends or profits.

Section 36(1)(iii) – Interest on Borrowed Capital:

Deductions are permitted for interest paid on capital borrowed for business or professional purposes. However, the deduction is subject to section 43B if the loan is obtained from specified financial institutions. Additionally, interest on capital borrowed for acquiring a capital asset is not deductible until the asset is put to use.

Section 36(1)(iiia) – Discount on Issue of Zero-Coupon Bonds:

Deductions are available for discounts on zero-coupon bonds, amortized over the life of the bonds on a pro-rata basis.

Section 36(1)(iv) – Employer’s Contribution to Provident Fund or Superannuation Fund:

Employer contributions to recognized provident funds or superannuation funds are deductible, subject to specified limits and payment basis.

Section 36(1)(iva) – Employer’s Contribution to National Pension Scheme (NPS):

Employers can claim deductions for contributions to pension funds specified under Section 80 CCD. The deduction is limited to 10% of employees’ salaries.

Section 36(1)(v) – Employer Contribution towards Approved Gratuity Fund:

Deductions are allowed for contributions towards approved gratuity funds created for employees’ benefit, subject to section 43B.

Section 36(1)(vi) – Allowance in respect of Dead or Permanently Useless Animals:

Expenditure on purchasing animals for business purposes is treated as capital expenditure. Deductions are allowed for the cost of animals minus proceeds from their sale as carcasses.

Section 36(1)(vii) – Bad Debts Written Off:

Deductions are permitted for bad debts related to business or profession, provided they were considered while computing income. No deduction is allowed for provision for bad debts.

Section 36(1)(viia) – Provision for Bad and Doubtful Debts relating to Rural Branches of Commercial Banks:

Banks and financial institutions can claim deductions for provisions for bad debts, subject to specified conditions.

Section 36(1)(viii) – Transfer to Special Reserve:

Profits transferred to special reserves by eligible businesses can be claimed as deductions, subject to certain limitations.

Section 36(1)(ix) – Family Planning Expenditure:

Deductions are allowed for capital expenditure on family planning, amortized over five years, with the first installment claimed in the year of expense.

Section 36(1)(xv) – Securities Transaction Tax:

Traders can claim deductions for Securities Transaction Tax when shares, units, or commodities are part of their stock-in-trade.

Section 36(1)(xvii) – Expenditure by Co-Operative Society for Purchase of Sugarcane:

Cooperative societies engaged in sugar manufacturing can claim deductions for sugarcane purchases at government-fixed prices.

Section 36(1)(xviii) – Marked to Market Loss:

Deductions are available for marked-to-market losses as per Income Computation & Disclosure Standards.

These provisions in Section 36(1) of the Income Tax Act allow businesses and professionals to claim deductions for various expenses incurred in the course of their business or profession, thereby reducing their taxable income.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/