Other Deductions

Introduction

Income-tax Act provides a list of various revenue expenses which are allowed as deduction, while computing the income under the head PGBP, on fulfilment of certain conditions. If the prescribed conditions are not fulfilled, these expenses shall be disallowed while computing the business profits.

1. List of Deductions

The deductions available under this provision shall be as follows:

1.1. Deduction for insurance premium [Section 30(a)/(b)/(c)]

The insurance premium paid by the assessee, in respect of following, shall be allowed as deduction under this provision.

1.1-1. Premium for insurance of stocks

The amount of insurance premium paid against risk of damage or destruction of stocks, used for the purposes of business or profession, is fully deductible in computing the taxable profits of a business or profession.

1.1-2. Premium for insurance of cattle

Insurance premium paid by the federal milk cooperative society on the life of cattle, owned by a member of primary milk co-operative society, affiliated to it, is deductible in computing the taxable profits of such federal milk cooperative society.

1.1-3. Premium for health insurance of employees

Any premium paid by the employer, through any mode not being in cash,  to effect or to keep in force an insurance on the health of his employees is allowed as deduction. Deduction is available if premium is paid under a scheme framed in this behalf by the General Insurance Corporation of India and approved by the Central Government or any scheme of any other insurer approved by IRDA.

1.2. Deduction for bonus or commission [Section 32(a)]

The bonus or commission paid to an employee is deductible under this provision on fulfillment of two conditions.

First, such bonus or commission should not otherwise have been payable to them as profit or dividend. The provision has been designed to check that private companies don’t avoid the payment of dividend distribution tax by distributing the profits to the shareholders as bonus or commission by showing them as the employees of the company. However, if such shareholders are actually the employees of the company and are given bonus based on their salary and performance, deduction for the amount so paid cannot be refused

Second, such sum has been actually paid on or before the due date of furnishing return of income for the relevant tax year. Even if an assessee follows mercantile system of accounting, deduction of bonus or commission is allowed on actual payment basis by virtue of Section 37. If bonus or commission is paid after the due date, the deduction is allowed in the tax year in which bonus or commission is actually paid.

1.3. Deduction for interest on borrowed capital [Section 32(b)]

Main article: Interest on Borrowed Capital

Where an assessee borrows money to acquire an asset, amount of interest, pertaining to the period before asset is put to use, shall be added to the actual cost of such asset in accordance with provisions of Section 39(1)(a). After an asset is put to use, the interest on the capital borrowed, pertaining to the period after such asset is put to use, shall be allowed as deduction under this provision. Similarly, interest on borrowings taken for operational activities shall be allowed as deduction under this provision.

1.4. Deduction for discount on zero coupon bonds [Section 32(d)]

See also: Meaning of zero-coupon bond under income-tax

Discount on zero-coupon bonds means the difference between money realized from issue of zero-coupon bonds and the amount payable on maturity or redemption of such bonds by the issuer. Such discount shall be allowed as deduction to the issuer on pro-rata basis, having regard to the period of life of such bond. In other words, discount on zero-coupon bonds shall be amortized over the period commencing from the date of issue of the bond and ending on the date of maturity or redemption of such bond.

The maturity of zero coupon bonds will be regarded as ‘transfer’ and the resultant gains shall be taxable under the head capital gains. The amount paid to the investor on maturity of bonds shall not be subject to TDS under Section 393(1) [Table: S. No. 5].

1.4.1. Computation of pro rata discount on zero-coupon bonds

Computation of pro rata amount of discount on a zero coupon bond shall be computed in the following steps:

Step-1

The period of life, i.e. the period commencing from the date issue of bond and ending with the date of maturity or redemption of bond, shall be converted into number of calendar months. Where the month in which such bond is issued or the bond matures or is redeemed contains a part of the month, it will be regarded as a complete month if such part contains 15 days or more, otherwise such part shall be ignored.

Step-2

The amount of discount shall be divided by the number of calendar months computed in the step-1 above.

Step-3

Pro-rata amount of discount for a tax year shall be computed by multiplying the amount determined in step-2 with the number of calendar months falling within the relevant tax year.

1.5. Deduction for contribution to employee’s PF or Superannuation fund [Section 29(1)(a)]

Main article: Deduction for employer’s contribution to PF and Superannuation Fund

If employer contributes in employees’ provident fund or superannuation fund, the contribution so made shall be allowed as deduction. The deduction to be available for the contribution made by the employer, in employee’s provident fund and superannuation fund, shall not exceed 27%

Deduction shall be allowed only when such sum has been actually paid on or before the due date of furnishing return of income for the relevant tax year. Even if an assessee follows mercantile system of accounting, deduction of contribution to PF and superannuation fund is allowed on actual payment basis by virtue of Section 37. If such sum is paid after the due date, the deduction is allowed in the tax year in which it is actually paid.

1.6. Deduction for contribution to notified pension scheme [Section 29(1)(b)]

When contribution to pension scheme [as referred to in Section 124] is made by the employer, such contribution is allowed as deduction to the employer. However deduction shall be lower of the amount contributed by employer to NPS, or 14% of salary of the employee.

‘Salary’ for this purpose means basic salary and includes dearness allowance, if terms of employment so provide. It also includes commission based on a fixed percentage of turnover achieved by an employee as per terms of contract of employment.

1.7. Deduction for contribution to approved gratuity fund [Section 29(1)(c)]

See also: Taxability of Gratuity

Contribution made by the employer towards an approved gratuity fund, created exclusively for benefit of employees under an irrevocable trust, is allowable as deduction. The amount deductible on account of ordinary annual contribution to the gratuity fund shall not exceed 8.33% of the salary of each employee.

The amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed 8.33% of the employee’s salary for each year of his past service with the employer.

Deduction shall be allowed only when such sum has been actually paid on or before the due date of furnishing return of income for the relevant tax year. Even if an assessee follows mercantile system of accounting, deduction of contribution to gratuity fund is allowed on actual payment basis by virtue of Section 37. If such sum is paid after the due date, the deduction is allowed in the tax year in which it is actually paid.

1.8. Employees’ Contribution to the Fund [Section 29(1)(e)(i)]

Main article: Deduction for employee’s contribution to welfare fund

When employer receives any sum from the employees towards their contribution to welfare fund, i.e. PF or ESI, such sum is treated as business income of the employer. Deduction, for such contribution, is allowed to the employer when it is credited by the employer to the employee’s account in the relevant fund on or before the due date of filing of return of income under section 263(1).

1.9. Loss of Animals [Section 32(j)]

Deduction under this provision is allowed for animals

The deduction is allowed in the tax year in which the animal dies or become permanently useless for the business. Thus, the actual cost incurred by the assessee, to buy an animal, shall be allowed as deduction in the year in which such animal dies or become permanently useless. The deduction to be allowed shall be difference between the actual cost of the animals to the assessee and the amount realised in respect of carcasses or sale of animals.

Example, if assessee buy a sniffer dog for his security business. The cost incurred by him to buy such dog shall be allowed as deduction in the year in which the dog dies or become permanently useless.

1.10. Bad Debts [Section 31(2)]

Main article: Deduction for bad-debts

Bad debt is allowed as deduction in the year in which it is actually written off as irrecoverable in the books of the assessee. It is not obligatory for the assessee to establish that the debt is irrecoverable in the tax year. If it has been written off as irrecoverable in the accounts of the assessee for the tax year, it will be sufficient for claiming it as bad debt. If amount has been claimed as bad and doubtful debts and is not written off in the respective accounts of debtors, the same would not be allowable as deduction under this provision.

1.11. Provision for bad-debts [Section 31(1) [Table S. No. 1]]

Main article: Deduction for provision for bad-debts

The deduction for provision made for bad and doubtful debts can be claimed only by a scheduled bank, non-scheduled bank, co-op. bank, foreign bank, financial institutions and NBFC. The deduction to be allowed under this provision shall be lower of the provision made by the eligible assessee or the amount computed as percentage of total income of eligible assessee (or as percentage of avg. rural advance, in case of scheduled and non-scheduled bank).

1.12. Transfer to special reserve [Section 32(e))]

Main article: Deduction for sum transferred in special reserve

This deduction is allowed to the banks, housing finance companies and financial institutions for the sum deposited in special reserve account. The deduction to be allowed under this provision shall be lower of sum deposited in special reserve account or 20% of the profits derived from the eligible business. When any amount is withdrawn from the special reserve account, it will be chargeable to tax in the year in which amount is withdrawn, regardless of the fact whether the business is in existence in that year or not.

1.13. Family planning expenditure [Section 32(i)]

1.13-1. Revenue expenditure

Any bona fide expenditure incurred by an assessee, being a company, for the purpose of promoting family planning among its employees is allowable as deduction in the year in which such expenditure is incurred.

1.13-2. Capital expenditure

Capital expenditure incurred to promote family planning among employees is allowed as deduction in five equal instalments, commencing from the tax year in which such expenditure is incurred. Such deduction for 1/5

If company amalgamates with another Indian company before expiry of 5 years, Indian amalgamated company (transferee) is allowed to claim deduction for the unexpired period from the period beginning with the year in which amalgamation takes place.

If asset, acquired for promoting family planning, is transferred without having been used for any other purposes, lower of following amounts shall be chargeable to tax as business income of the tax year in which the sale takes place:

(a) Sale proceeds received from transfer of asset; or

(b) Deduction already allowed under this provision.

If the sale proceeds realized from transfer of such asset exceeds the cost of acquisition, such excess amount shall be chargeable to tax under the head Capital Gains.

This provision is applicable only if an asset is sold without using it for any other purposes. If an asset, purchased for purpose of promoting family planning, is utilized for other business purposes on completion of said purpose, then for the purpose of claiming depreciation the actual cost of such asset to the assessee is taken to be the actual cost to the assessee as reduced by the amount of any deduction allowed under this provision.

1.14. Revenue Expenditure Incurred by Statutory Corp. [Section 32(f)]

Any revenue expenditure incurred by a notified entity, established under an Act, for the objects and purposes authorised by the Act, shall be allowed as a deduction.

For the purpose of this deduction, following entities have been notified so far:

(a) Oil Industry Development Board

(b) National Dairy Development Board

(c) Hyderabad Urban Development Authority

(d) National Bank For Agriculture and Rural Development (NABARD)

1.15. Contribution to credit guarantee trust fund [Section 32(c)]

A public financial institution can claim deduction in respect of its contribution made to a notified credit guarantee fund trust for small industries (i.e., Credit Guarantee Fund Trust for Micro and Small Enterprises)

1.16. Securities Transaction Tax [Section 32(k)]

Securities transaction tax paid by the assessee, in respect of taxable securities transactions entered into in the course of his business during the tax year, is allowed to be deducted. This deduction is allowed provided income arising from taxable securities transactions is included in the income computed under the head Profits and gains of business or profession.

1.17. Commodity Transaction Tax [Section 32(k)]

Commodity transaction tax paid by the assessee, in respect of taxable commodities transactions entered into in the course of his business during the tax year, is allowed to be deducted. This deduction is allowed provided income arising from taxable commodities transactions is included in the income computed under the head Profits and gains of business or profession.

1.18. Expenditure for purchase of sugarcane [Section 32(g)]

The deduction under this provision is allowed in respect of expenditure incurred by a co-operative society, which is engaged in the business of manufacture of sugar, for purchase of sugarcane at a price which is equal to or less than the price fixed or approved by the Government. The deduction to be allowed under this provision shall be lower of purchase price of the sugarcane or price fixed or approved by the Government.

1.18-1. Why full deduction is not allowed?

Sugar factories operating in the co-op. sectors pay to sugarcane growers a final amount, often referred to as Final Cane Price (FCP) which is over and above the Statutory Minimum Price (SMP) fixed by the Government. The payment of FCP by the co-op. sugar factories over and above the SMP often resulted into tax litigation. The co-op. sugar factories were claiming this excess payment as business expenditure whereas the same has been disallowed in the on the ground that the excess price paid for purchase of sugar cane over and above SMP is in the nature of distribution of profit and hence not allowable a deduction.

In order to provide certainty in this matter, this provision was inserted to provide that the sum paid for purchase of sugarcane by the co-op. societies at a price which is equal to or less than the price fixed by or approved by the Government shall be allowed as deduction for computing business income of the sugar co-op. factories.

1.18-2. Price fixed by State Government v. Central Government

The CBDT has clarified

Further, it also includes State Advised Price, which may be higher than the Statutory Minimum price/Fair and remuneration price fixed by the Central Government.

1.19. Marked to Market Loss [Section 32(h)]

‘Marked-to-Market’ is a methodology of revaluing a financial instrument based on its market price on the closing day of the accounting period. A financial instrument is valued at market rate so as to report its actual value on the date of reporting.

As per ICDS-VIII (Securities),the listed securities held as stock-in-trade shall be valued at lower of actual cost initially recognised or net realisable value at the end of the tax year. Where due to such restatement, any loss arises, it shall be allowed as deduction under Section 32(h). While as if any gain arises due to such valuation, it shall be taxable as business income under Section 26.

The option to restate the value at the year-end shall not be available in respect of securities, which are not listed or which are listed but not quoted on a recognised stock exchange. Such securities shall be recognised in the books at the actual cost at which it has been recognised initially. If any notional gain or loss is recognized by the assessee in the books, it shall be disallowed under Section 36(9).

References

Loyal Motor Service Co. Ltd. v. CIT (1946) 14 ITR 674 (Bom.)

Rule 305 of the Income-tax Rules, 2026

Gestetner Duplicators (P.) Ltd. v. CIT [1979] 1 Taxman 1 (SC)

Word ‘animals’ shall include birds and chicken - India Poultry (P.) Ltd. v. CIT [2007] 104 ITD 299 (Hyd.).

Circular 18/2021, dated 25-10-2021

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.