Income-Tax-Deductions-for-Business

Income Tax Deductions for Business

Income Tax Deductions for Business

The Income Tax Act levies tax on income after allowing deductions to be claimed for expenses which were incurred exclusively to earn the income. While calculating the income tax payable by a company, Limited Liability Partnership (LLP), partnership or proprietorship, a major income head is Profit and Gains from Business or Profession. The procedure for calculating profit and gains from business or profession is dealt with in a separate article. In this article, we look at the list of income tax deductions available for business from the head profit and gains from business or profession.

Deductions from Profits and Gains of Business or Profession

The following table can be used to identify the items which can be claimed as a deduction under the head profits and gains of business or profession:

Section

Nature of expenditure

Quantum of deduction

Assessee

30

Rent, rates, taxes, repairs (excluding capital expenditure) and insurance for premises

Actual expenditure incurred excluding capital expenditure

All assessee

31

Repairs (excluding capital expenditure) and insurance of machinery, plant and furniture

Actual expenditure incurred excluding capital expenditure

All assessee

32(1)(i)

Depreciation on

i) buildings, machinery, plant or furniture, being tangible assets;

ii) know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, being intangible assets

Allowed at a prescribed percentage on Straight Line Method for each asset

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, the deduction in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset.

Assessees engaged in the business of generation or generation and distribution of power

Note:

Taxpayers engaged in the business of generation or generation and distribution of power shall have the option to claim depreciation either on the basis of straight-line basis method or written down value method on each block of asset.

32(1)(ii)

Depreciation on

i) buildings, machinery, plant or furniture, being tangible assets;

ii) know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature, being intangible assets

Allowed at a prescribed percentage on WDV method for each block of asset

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, the deduction in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset.

All assessees
32(1)(iia)

Additional depreciation on new plant and machinery (other than ships, aircraft, office appliances, second-hand plant or machinery, etc.).

(subject to certain conditions)

Additional depreciation shall be available @20 % of the actual cost of new plant and machinery.

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, then deduction of additional depreciation would be restricted to 50% in the year of acquisition and balance 50% would be allowed in the next year

All assessee engaged in

– manufacture or production of any article or thing; or

– generation, transmission or distribution of power (if taxpayer is not claiming depreciation on the basis of straight-line method)

Proviso to Section 32(1)(iia)

Additional depreciation on new plant and machinery (other than ships, aircraft,office appliances, second hand plant or machinery, etc.))

(Subject to certain conditions)

Additional depreciation shall be available @35 % of the actual cost of new plant and machinery.

Provided that where an asset is acquired by the assessee during the previous year and is put to use for a period of less than one hundred and eighty days in that previous year, then deduction of additional depreciation would be restricted to 50% of actual cost in the year of acquisition and balance 50% would be allowed in the next year

Note:

1. The manufacturing unit should be set-up on or after 1st day of April, 2015.

2. New plant and machinery acquired and installed during the period beginning on the 1st day of April 2015 and ending before the 1st day of April, 2020

All assessees- where an assessee sets up an undertaking or enterprise for production or manufacture of any article or thing in any notified backward area in state of the state of Andhra Pradesh, Bihar, Telangana or West Bengal.

32AC

Deduction under section 32AC is available if actual cost of new plant and machinery acquired and installed by a manufacturing company during the previous year exceeds Rs. 25/100 Crores, as the case may be.(Subject to certain conditions)

15% of the actual cost of new asset

Company engaged in the business of manufacturing or production of any article or thing

32ADInvestment allowance for investment in new plant and machinery if manufacturing unit is set-up in the notified backward area in the state of Andhra Pradesh, Bihar, Telangana or West Bengal(Subject to certain conditions)

Investment allowance shall be available @15 % of the actual cost of new plant and machinery in the year of installation of new asset.

Note:-

1) The new asset should be acquired and installed during the period beginning on the 1st day of April 2015 and ending before the 1st day of April, 2020.

2) The manufacturing unit should be set-up on or after the 1st day of April 2015.

3) Deduction shall be allowed under Section 32AD in addition to deduction available under Section 32AC if assessee fulfils the specified conditions

All assessee who acquired new plant and machinery for the purpose of setting up a manufacturing unit in the notified backward area in the state of Andhra Pradesh, Bihar, Telangana or West Bengal

33AB

Amount deposited in Tea/Coffee/Rubber Development Account by assessee engaged in business of growing and manufacturing tea/Coffee/Rubber in India

Deduction shall be lower of following:

a) The amount deposited in account with National Bank for Agricultural and Rural Development (NABARD) or in Deposit Account of Tea Board, Coffee Board or Rubber Board in accordance with approved scheme; or

b) 40% of profits from such business before making any deduction under section 33ABand before adjusting any brought forward loss.

(Subject to certain conditions)

All assessee engaged in the business of growing and manufacturing tea/Coffee/Rubber

33ABA

Amount deposited in Special Account with SBI/Site Restoration Account by assessee carrying on business of prospecting for, or extraction or production of, petroleum or natural gas or both in India

The deduction shall be lower of the following:

a) Amount deposited in Special Account with SBI/Site Restoration Account; or

b) 20% of profits from such business before making any deduction under section 33ABA and before adjusting any brought forward loss.

(Subject to certain conditions)

All assessee engaged in the business of prospecting for, or extraction or production of, petroleum or natural gas or both in India

35(1)(i)

Revenue expenditure on scientific research pertaining to the business of the assessee is allowed as deduction (Subject to certain conditions).

Entire amount incurred on scientific research is allowed as deduction.

Expenditure on scientific research within 3 years before commencement of business (in the nature of purchase of materials and salary of employees other than perquisite) is allowed as deduction in the year of commencement of business to the extent certified by prescribed authority.

All assessee

35(1)(ii)

Contribution to approved research association, university, college or other institution to be used for scientific research shall be allowed as deduction (Subject to certain conditions)

175% of sum paid to such association, university, college, or other institution is allowed as deduction.

150% of sum paid to such association, university, college or other institution is allowed as deduction (applicable from AY 2018-19)

Note:- From the AY beginning on or after the 1st day of April, 2021, the deduction shall be equal to the sum so paid.

All assessee

35(1)(iia)

Contribution to an approved company registered in India to be used for the purpose of scientific research is allowed as deduction (Subject to certain conditions)

125% of the sum paid to the company is allowed as deduction

Entire sum paid to the company is allowed as a deduction

(applicable from AY 2018-19)

All assessee

35(1)(iii)

Contribution to approved research association, university, college or other institution with objects of undertaking statistical research or research in social sciences shall be allowed as deduction (Subject to certain conditions)

125% of sum paid to such association, university, college, or other institution is allowed as a deduction

The entire sum paid to such association, university, college or other institution is allowed as a deduction

(applicable from AY 2018-19)

All assessee

35(1)(iv)read with 35(2)

Capital expenditure incurred during the year on any scientific research relating to the business carried on by the assessee is allowed as deduction (Subject to certain conditions)

Entire capital expenditure incurred on scientific research is allowed as deduction.

Capital expenditure incurred within 3 years before commencement of business is allowed as deduction in the year of commencement of business.

Note:

i. Capital expenditure excludes land and any interest in land;

ii. No depreciation shall be allowed on such assets.

All assessee

35(2AA)

Payment to a National Laboratory or University or an Indian Institute of Technology or a specified person is allowed as deduction.

The payment should be made with the specified direction that the sum shall be used in a scientific research undertaken under an approved programme.

200% of payment is allowed as deduction (Subject to certain conditions).

150% of payment is allowed as deduction (applicable from AY 2018-19)

Note:-

From the A.Y. beginning on or after the 1st day of April 2021, the deduction shall be equal to the sum so paid.

All assessee

35(2AB)

Any expenditure incurred by a company on scientific research (including capital expenditure other than on land and building) on in-house scientific research and development facilities as approved by the prescribed authorities shall be allowed as deduction (Subject to certain conditions).

Expenditure on scientific research in relation to Drug and Pharmaceuticals shall include expenses incurred on clinical trials, obtaining approvals from authorities and for filing an application for patent.

200% of expenditure so incurred shall be allowed as deduction.

150% of expenditure so incurred shall be allowed as deduction (applicable from AY 2018-19)

Note:

i. The company should enter into an agreement with the prescribed authority for co-operation in such research and development and fulfils conditions with regard to maintenance of accounts and audit thereof and furnishing of reports in such manner as may be prescribed.

ii.  From the A.Y. beginning on or after the 1st day of April 2021, the deduction shall be equal to the expend the so incurred.

Company engaged in business of biotechnology or in any business of manufacturing or production of eligible articles or things

35ABACapital expenditure incurred and actually paid for acquiring any right to use spectrum for telecommunication services shall be allowed as deduction over the useful life of the spectrum.

Deduction will be available in equal instalments starting from the year in which actual payment is made and ending in the year in which spectrum comes to an end.

Note:

If spectrum fee is actually paid before the commencement of business, the deduction will be available from the year in which business is commenced.

All Assessee engaged in telecommunication services

35ABB

Capital expenditure incurred for acquiring any license or right to operate telecommunication services shall be allowed as deduction over the term of the license.

Deduction would be allowed in equal instalments starting from the year in which such payment has been made and ending in the year in which license comes to an end.

All Assessee engaged in telecommunication services

35AC

Expenditure by way of payment of any sum to a public sector company/local authority/approved association or institution for carrying out any eligible scheme or project (Subject to certain conditions).

Actual payment made to prescribed entities. However, a company can also claim deduction for expenditure incurred by it directly on eligible projects.

Note:-

No deduction in any A.Y. commencing on or after the 1st day of April 2018

All assessee. However, the deduction for direct expenditure is allowed only to a company

35AD

Deduction in respect of `expenditure on specified businesses, as under:

a) Setting up and operating a cold chain facility

b) Setting up and operating a warehousing facility for storage of agricultural produce

c) Building and operating, anywhere in India, a hospital with at least 100 beds for patients

d) Developing and building a housing project under a notified scheme for affordable housing

e) Production of fertilizer in India

(Subject to certain conditions)

150% of capital expenditure incurred for the purpose of business is allowed as deduction provided the specified business has commenced its operation on or after 01-04-2012.

100% of capital expenditure will be allowed to be deducted from the assessment year 2018-19 onwards

Note: If such specified businesses commence operations on or before 31-03-2012 but after prescribed dates, deduction shall be limited to 100% of capital expenditure.

Note: No deduction of any capital expenditure above Rs 10,000 shall be allowed if it is incurred in cash.

All assessee

35AD

Deduction in respect of expenditure on specified businesses, as under:

a) Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;

b) Building and operating, anywhere in India, a hotel of two-star or above category;

c) Developing and building a housing project under a scheme for slum redevelopment or rehabilitation

d) Setting up and operating an inland container depot or a container freight station

e) Bee-keeping and production of honey and beeswax

f) Setting up and operating a warehousing facility for storage of sugar

g) Laying and operating a slurry pipeline for the transportation of iron ore

h) Setting up and operating a semiconductor wafer fabrication manufacturing unit

 i)  Developing or maintaining and operating, or developing, maintaining and operating a new infrastructure facility

(Subject to certain conditions)

100% of capital expenditure incurred for the purpose of business is allowed as deduction provided specified businesses commence operations on or after the prescribed dates.

Note: No deduction of any capital expenditure above Rs 10,000 shall be allowed if it is incurred in cash.

All assessee

Note: Such deduction is available to Indian company in case of following business, namely;-

 i) The business of laying and operating a cross-country natural gas or crude or petroleum oil pipeline network

ii)  Developing or maintaining and operating or developing, maintaining and operating a new infrastructure facility.

35CCA

Payment to following Funds are allowed as a deduction:

a) National Fund for Rural Development; and

b) Notified National Urban Poverty Eradication Fund

Actual payment to specified funds

All assessee

35CCC

Expenditure (not being the cost of land/building) incurred on a notified agricultural extension project for the purpose of training, educating and guiding the farmers shall be allowed as a deduction, provided the expenditure to be incurred is expected to be more than Rs. 25 lakhs (subject to certain conditions).

150% of the expenditure (Subject to certain conditions)

Note:-

100% deduction shall be allowed from the 1st day of April 2021

All assessee

35CCD

Expenditure incurred by a company (not being expenditure in the nature of cost of any land or building) on any notified skill development project is allowed as deduction (Subject to certain conditions).

150% of the expenditure (Subject to certain conditions)

Note:

 (i) No deduction shall be allowed to a company engaged in manufacturing alcoholic spirits or tobacco products.

(ii) 100% deduction shall be allowed for the AY beginning on or after the 1st day of April 2021

A company engaged in manufacturing of any article or providing specified services

35D

An Indian company can amortize certain preliminary expenses (up to a maximum of 5% of the cost of the project or capital employed, whichever is more) (Subject to certain conditions and nature of expenditures)

Qualifying preliminary expenditure is allowable in each of 5 successive years beginning with the previous year in which the extension of the undertaking is completed or the new unit commences production or operation.

Indian Company

35DD

Expenditure incurred after 31-3-1999 in respect of amalgamation or demerger can be amortized by an Indian Company

Expenditure is allowed as deduction in five equal instalments in 5 previous years starting with the year in which amalgamation or demerger took place.

Indian Company

35DDA

Expenditure incurred under Voluntary Retirement Scheme is allowed as deduction.

Each payment under VRS is allowed as a deduction in five equal instalments in 5 previous years.

All Assessee

35E

Qualifying expenditure incurred by resident persons on prospecting for the minerals or on the development of mine or other natural deposit of such minerals shall be allowed as deduction (Subject to certain conditions).

Eligible expenditure is allowed as deduction in ten equal instalments in 10 previous years.

Resident persons

36(1)(i)

Insurance premium covering the risk of damage or destruction of stocks/stores

Actual expenditure incurred

All Assessee

36(1)(ia)

Insurance premium covering the life of cattle owned by a member of co-operative society engaged in supplying milk to federal milk co-operative society

Actual expenditure incurred

All Assessee

36(1)(ib)

The medical insurance premium paid by any mode other than cash, to insure employee’s health under (a) scheme framed by GIC of India and approved by Central Government; or (b) scheme framed by any other insurer and approved by IRDA

Actual expenditure incurred

All Assessee

36(1)(ii)

Bonus or commission paid to employees which would not have been payable as profit or dividend if it had not been paid as bonus or commission

Actual expenditure incurred

All Assessee

36(1)(iii)

Interest on borrowed capital (Subject to certain conditions)

Interest paid in respect of capital borrowed for the purposes of the business or profession shall be allowed as deduction. However, if capital is borrowed for acquiring an asset, then interest for any period beginning from the date on which capital was borrowed till the date on which asset was first put to use, shall not be allowed as deduction.

All Assessee

36(1)(iiia)

Discount on Zero-Coupon Bonds (Subject to certain conditions)

Pro-rata amount of discount on zero-coupon bonds shall be allowed as deduction over the life of such bond

Specified Assessee

36(1)(iv)

Employer’s contributions to recognized provident fund and approved superannuation fund [subject to certain limits and conditions]

Actual expenditure incurred

All Assessee

36(1)(iva)

Any sum paid by assessee-employer by way of contribution towards a pension scheme, as referred to in section 80CCD, on account of an employee.

Actual expenditure not exceeding 10% of the salary* of the employee

*Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits)+ turnover based commission

All Assessee – Employer

36(1)(v)

Employer’s contribution towards approved gratuity fund created exclusively for the benefit of employees under an irrevocable trust shall be allowed as deduction (Subject to certain conditions).

Actual expenditure not exceeding 8.33% of the salary of each employee

All Assessee – Employer

36(1)(va)

Deposit of employee’s contributions in their respective provident fund or superannuation fund or any fund set up under Employees’ State Insurance Act, 1948

Actual amount received to the extent the amount is credited to the employee’s account in the relevant fund on or before the due date specified under relevant Act

All Assessee – Employer

36(1)(vi)

Allowance in respect of animals which have died or become permanently useless (Subject to certain conditions)

The actual cost of acquisition of such animals less realization on sale of carcasses of animals

All Assessee

36(1)(vii)

Bad debts which have been written off as irrecoverable (Subject to certain conditions)

Actual bad debts which have been written off from books of accounts

Note:-

However, if amount of debt or part thereof has been taken into account in computing the income of assessee on basis of income computation and disclosure standards notified under Section 145(2) without recording the same in accounts then, such debt shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable. It shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts.

All Assessee

36(1)(viia)

Deductions for provision for bad and doubtful debts created by certain banks, financial institutions and non-banking financial company (Subject to certain conditions).

Note

Deduction in respect of bad debts actually written off under section 36(1)(vii) shall be limited to that amount of bad debts which exceed the provision for bad and doubtful debts created under section 36(1)(viia).

Deductions for provision for bad and doubtful debts shall be limited to following:

(a) In case of scheduled and non-scheduled banks: Sum not exceeding aggregate of 8.5% of total income (before any deductions under this provision and Chapter VI-A) and 10% of aggregate average advances made by rural branches of such bank;

(b) In case of Financial Institutions: Up to 5% of total income before any deductions under this provision and Chapter VI-A; and

(c) In case of foreign banks: Up to 5% of total income before any deductions under this provision and Chapter VI-A

(d) In case of non-banking financial company: Up to 5% of total income before any deduction under this provision and chapter VI-A

Banks, Public Financial Institutions, Non-banking financial company, State Financial Corporation, State Industrial Investment Corporations

36(1)(viii)

Deduction under this provisions is allowed to following entities in respect of amount transferred to special reserve account:

a) Financial Corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India; or

b) Public company registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of residential houses in India.

[Subject to certain conditions]

Deduction shall be allowed to the extent of lower of following:

a) Amounts transferred to the special reserve account

b) 20% of profits derived from eligible business

c) 200% of paid-up capital and general reserve (on last day of the previous year) minus balance in special reserve account (on the first day of the previous year)

Specified financial corporations or public company

36(1)(ix)

Expenditure incurred by a company on the promotion of family planning amongst employees is allowed as a deduction

1) Entire revenue expenditure is allowed as deduction

2) Capital expenditure shall be allowed as deduction in five equal instalments in five years

Company

36(1)(xii)

Any expenditure incurred by a notified corporation or body corporate constituted or established by a Central, State or Provincial Act, for the objects and purposes authorized by the respective Act is allowed as a deduction

Actual expenditure incurred (not being in the nature of capital expenditure)

Notified corporations

36(1)(xiv)

Contribution to Credit Guarantee Trust Fund for micro and small industries is allowed as a deduction

Actual expenditure incurred

Public Financial Institutions

36(1)(xv)

Securities Transaction Tax paid

Actual expenditure incurred if corresponding income is included as income under the head profits and gains of business or profession

All Assessee

36(1)(xvi)

Amount equal to commodities transaction tax paid by an assessee in respect of taxable commodities transactions entered into in the course of his business during the previous year is allowed as a deduction

Actual expenditure incurred if corresponding income is included as income under the head profits and gains of business or profession

All Assessee

36(1)(xvii)Amount of expenditure incurred by a co-operative society engaged in the business of manufacture of sugar for purchase of sugarcane.

Deduction would be allowed the extent of lower of the following:

a) Actual purchase price of sugarcane, or

b) Price of sugarcane fixed or approved by the Government

Co-operative society engaged in the business of manufacture of sugar

37(1)

Any other expenditure [not being personal or capital expenditure and expenditure mentioned in sections 30 to 36] laid out wholly and exclusively for purposes of business or profession

Actual expenditure incurred

All Assessee

37(2B)

Expenditure on advertisement in any souvenir, brochure etc. published by a political party shall not be allowed as a deduction

Not Allowed

All Assessee

Expenses Deductible Based on Actual Expenditure

The following expenses shall be allowed as deduction if such expenditure is actually paid on or before the due date of filing of return of income:

SectionParticulars
43B(a)Any Tax, Duty, Cess or Fees under any Law
43B(b)Any contribution to Provident Fund/Superannuation Fund/Gratuity Fund/Welfare Fund
43B(c)Bonus or Commission paid to employees which would not have been payable as profit or dividend
43B(d)Interest on Loan or Borrowings from Public Financial Institutions/State Financial Institutions etc.
43B(e)Interest on loan or advance from bank
43B(f)Payment of Leave Encashment
43B(g)Sum payable to the Indian Railways for the use of railway assets.

Know more about filing LLP income tax return or company income tax return filing.

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