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.
Table of Contents
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
- 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.
- 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.
- 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)(i) | Deduction for insurance premium paid to cover the risk of damage and destruction of stock in trade, used for the purpose of Business & Profession of the assessee. |
| 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 shall be allowed as deduction. |
| Section 36(1)(ib) | Deduction for health insurance premium paid for insurance of employees. Deduction will be allowed for the premium paid by any mode other than cash. |
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:
Under current tax provisions, banks and certain financial institutions are eligible to claim a deduction for provisions made toward bad and doubtful debts. The extent of deduction permitted varies depending on the type and classification of the institution.
Eligible Deductions:
- For Indian Scheduled Banks, Non-Scheduled Banks, and Co-operative Banks
(excluding primary agricultural credit societies and primary cooperative agricultural and rural development banks):
These entities can claim a deduction equal to 8.5% of their gross total income, plus 10% of the aggregate average advances made by rural branches. - For Foreign Banks and Other Financial Institutions:
A deduction of 5% of gross total income is permitted.
It is important to note that the gross total income used for computing this deduction must be considered before applying any deductions under Chapter VI-A of the Income Tax Act.
Section 36(1)(viii) – Transfer to Special Reserve:
Certain financial institutions, such as IDFC and housing finance companies, are allowed to claim a tax deduction when profits from eligible business activities are transferred to a designated special reserve. This incentive is aimed at promoting long-term financing in key sectors of the economy.
Key Deduction Limits:
The deduction is capped at the lower of the following:
- 20% of the profits derived from the eligible business, or
- The amount by which the reserve exceeds twice the sum of the paid-up capital and the balance in general reserves at the beginning of the year.
Eligible Business Activities:
For this purpose, eligible business refers to the provision of long-term finance to enterprises engaged in:
- Industrial development
- Agricultural development
- Infrastructure projects
- Housing development
Tax Implication on Withdrawal:
If any amount from the special reserve is subsequently withdrawn, it will be treated as business income in the year of withdrawal and taxed accordingly.
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.
Summary Table: Deductions under Section 36 of the Income Tax Act, 1961
| Nature of Deduction | Amount Allowed | Eligible Assessee |
|---|---|---|
| Insurance premium on stock | Actual expenditure incurred | Any assessee |
| Insurance premium on life of cattle | Actual expenditure incurred | Federal milk co-operative society |
| Insurance premium on health of employees | Actual expenditure incurred | Any assessee |
| Bonus or commission to employees | Actual expenditure incurred | Any assessee |
| Interest on borrowed capital | Actual expenditure incurred | Any assessee |
| Discount on Zero Coupon Bonds (ZCB) | Pro-rata amount of discount | Any assessee |
| Contribution to recognized PF or superannuation fund | Actual expenditure incurred | Any assessee |
| Contribution to NPS | Actual expenditure, capped at 10% of employee's salary | Any assessee |
| Contribution to approved gratuity fund | Actual expenditure incurred | Any assessee |
| Contribution to staff welfare schemes | Actual amount credited to employee’s account | Any assessee |
| Allowance for dead animals used in business | Cost of animal minus amount realized on sale | Any assessee |
| Bad debts written off | Actual bad debts written off in books | Any assessee |
| Provision for bad debts (banks & financial institutions) | - 8.5% of GTI + 10% of rural advances (Indian banks) - 5% of GTI (foreign banks) | Scheduled/non-scheduled/co-op banks, foreign banks, financial institutions |
| Transfer to special reserves | Up to 20% of profits from eligible business | Financial corps, banks, housing finance companies, PSU companies |
| Family planning expenses (capital in nature) | 1/5th of capital expense in year incurred, balance over next 4 years | Companies only |
| Expenses by statutory corporations | Actual expenditure for authorized purposes | Corporations/bodies under Central, State, or Provincial Act |
| Banking cash transaction tax | Actual expenditure incurred | Any assessee |
| Payment to credit guarantee fund trust | Actual expenditure incurred | Public financial institutions |
| Securities Transaction Tax (STT) | Actual expenditure incurred | Assessee in securities business |
| Commodity Transaction Tax (CTT) | Actual expenditure incurred | Assessee in commodity trading business |
| Sugarcane purchase expenses | Actual purchase price | Co-operative society (sugar manufacturer) |
| Marked-to-market losses | Actual loss incurred | Any assessee |
Frequently Asked Questions
1. Can a retail trader claim deduction for fire insurance premium paid on shop inventory?
Answer: Yes. Under Section 36(1)(i), the insurance premium paid for stock-in-trade (e.g., shop goods) to cover risks like fire or theft is fully deductible, provided it is used exclusively for the business.
2. A dairy farmer pays insurance premium for cattle through a co-operative society. Is it deductible?
Answer: Only if paid through a Federal Milk Co-operative Society. Under Section 36(1)(ia), deduction is allowed only when the society insures cattle owned by its members who supply milk to it.
3. Is health insurance premium paid in cash for employees deductible?
Answer: No. As per Section 36(1)(ib), health insurance premiums must be paid by non-cash modes (cheque, bank transfer, UPI, etc.) to be eligible for deduction.
4. My company paid Diwali bonus to staff in October. Can I claim it as a deduction?
Answer: Yes, under Section 36(1)(ii), bonus paid to employees is deductible if not linked to profit sharing or dividends, and if paid before the ITR filing due date per Section 43B.
5. I took a loan in April to buy a delivery van but used it only from August. Is the interest deductible?
Answer: Interest from August onwards is deductible under Section 36(1)(iii). Pre-August interest (before asset is put to use) must be capitalised and added to the asset’s cost.
6. My company issued zero-coupon bonds with a discount to investors. Can I deduct this discount?
Answer: Yes. Under Section 36(1)(iiia), the discount is not deductible in one year. It must be amortised annually on a pro-rata basis over the life of the bond.
7. If an employer contributes 12% to an employee’s NPS, is the entire amount deductible?
Answer: No. As per Section 36(1)(iva), the deductible limit is 10% of the employee’s salary (basic + DA). Excess contributions are not allowed.
8. I wrote off a ₹50,000 debtor in my books but did not file a legal suit. Is it still deductible?
Answer: Yes, as long as the amount is actually written off in the books, it qualifies under Section 36(1)(vii). Legal recovery efforts are not mandatory.
9. Can a co-operative bank claim both actual bad debts and provision for rural advances?
Answer: Yes. Under Section 36(1)(vii) and 36(1)(viia), such banks can claim actual bad debts written off and provision for bad/doubtful debts (based on 8.5% of GTI + 10% of rural advances), subject to conditions.
10. A housing finance company transferred 25% of its profit to a special reserve. Is the full amount deductible?
Answer: No. As per Section 36(1)(viii), deduction is restricted to 20% of profits from eligible business or the excess of special reserve over twice the capital + general reserves, whichever is lower.
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
