Business Income — Specific Deductions (Sections 28–38)
Business Income — Specific Deductions
Complete guide to all specific deductions and disallowances — premises and machinery costs, employee welfare, insurance premiums, bad debts, other deductions, the general clause, disallowances, cash payment rules, actual payment basis obligations, and deemed income provisions.
🔄 Replaces: Sections 30, 31, 32, 33, 36, 37, 40, 40A, 41, 43B of the Income Tax Act 1961
Section 28 — Premises, Machinery, Plant & Furniture
Replaces Sections 30 and 31 of the 1961 Act. Deductions in respect of business premises and assets:
| Clause | What is Allowed | Condition |
|---|---|---|
| (a) | Insurance premium against risk of damage or destruction of premises, machinery, plant or furniture | Used for business/profession |
| (b) | Land revenue, local rates, municipal taxes paid for premises | Used for business/profession |
| (c) | Rent paid for premises occupied as a tenant | Assessee is tenant |
| (d) | Current repairs to premises (not capital expenditure) — when occupied otherwise than as tenant (owner) | Revenue repairs only |
| (e) | Cost of repairs (not capital) to premises — when occupied as tenant and assessee has undertaken to bear repair costs | Tenant has repair obligation |
| (f) | Current repairs to machinery, plant or furniture (not capital expenditure) | Used for business/profession |
Section 29 — Employee Welfare Deductions
Replaces Section 36(1)(iv), (iva), (v) of the 1961 Act. For assessees as employers:
| Clause | What is Allowed | Limit / Condition |
|---|---|---|
| (a) | Contribution to recognised provident fund or approved superannuation fund | Within prescribed limits |
| (b) | Contribution to NPS (pension scheme under Section 124) for employees | Up to 14% of salary (dearness allowance included where terms provide) |
| (c) | Contribution to approved gratuity fund under irrevocable trust for exclusive benefit of employees | Fund must be approved under irrevocable trust |
| (d) | Provision for gratuity payable during the year, or contribution to approved gratuity fund | Once provision is made and deduction allowed, no further deduction on actual payment from such provision |
| (e) | Employee's contribution received by employer for PF/ESI/superannuation etc. — credited to employee's account by due date | Must be credited to employee's account by the statutory due date under the relevant law (this is stricter — "due date" here is the statutory due date, not ITR due date) |
Section 30 — Deduction of Certain Premiums
Replaces Section 36(1)(i) and (ib) of the 1961 Act. Three specific premium types allowed:
Premium for insurance against risk of damage/destruction of stocks or stores used for business/profession
Premium paid by a federal milk co-operative society to insure cattle owned by members of primary milk supply co-operative societies
Premium paid by employer (non-cash mode only) for health insurance of employees — under GIC/IRDAI approved schemes
Section 31 — Bad Debts & Provision for Bad Debts
Replaces Section 36(1)(vii) and (viia) of the 1961 Act. Two separate deductions — provisioning for banks and write-off for all assessees.
Section 31(1) — Provision for Bad & Doubtful Debts (Banks/NBFCs only)
| Assessee | Allowable Provision |
|---|---|
| Scheduled bank (Indian), non-scheduled bank, co-operative bank (excluding primary agricultural credit societies) | Up to 8.5% of total income + up to 10% of aggregate average advances by rural branches; optionally, additional amount from income on redemption of securities |
| Foreign bank, public financial institution, State Financial Corporation, State Industrial Investment Corporation, NBFC | Up to 5% of total income computed before this deduction and Chapter VIII |
Section 31(2) — Actual Bad Debt Write-off (All Assessees)
- Debt must have been written off as irrecoverable in the books of accounts in the tax year
- It must have been taken into account in computing income in the current or any earlier year, OR it represents money lent in the ordinary course of banking/money-lending business
- For banks: only the amount exceeding the credit balance in the bad debt provision account is additionally deductible as write-off
Recovery of written-off debt: If any amount is subsequently recovered on a previously written-off debt that is less than the full difference, the shortfall is deductible in the year of ultimate recovery.
Section 32 — Other Specific Deductions
Replaces multiple subsections of Section 36 of the 1961 Act.
| Clause | Deduction | Key Conditions / Notes |
|---|---|---|
| (a) | Bonus or commission to employee for services rendered | Only where amount would NOT have been payable as profits or dividend if not paid as bonus/commission. Must be actually paid (Section 37 applies). |
| (b) | Interest on capital borrowed for business/profession purposes | Interest on loans for acquisition of assets — disallowed from date of borrowing to date of first use of asset. Recurring subscriptions in Mutual Benefit Societies are treated as capital borrowed. |
| (c) | Contribution to credit guarantee fund trust for small industries (notified by Central Govt) | By public financial institutions |
| (d) | Pro-rata discount on zero coupon bonds | Spread over period of life of bond = (redemption value − issue price) / tenor. By infrastructure capital companies, funds, PSU, scheduled banks. |
| (e) | Special reserve — transfer to reserve by specified entities (banks, PFIs, housing finance companies) providing long-term finance | Maximum: 20% of eligible business profits. Cumulative cap: cannot exceed twice the paid-up share capital + general reserves. |
| (g) | Sugarcane price paid by co-operative sugar factories | At price equal to or below the Government-fixed price |
| (h) | Marked-to-market (MTM) loss and other expected losses | As computed per Income Computation and Disclosure Standards (ICDS) notified under Section 276(2) |
| (i) | Family planning expenditure by companies for employees | Capital expenditure: 1/5th in first year + 1/5th each year for 4 succeeding years |
| (j) | Animal death/permanent uselessness — difference between actual cost and amount realised from carcass | For animals used in business (not as stock-in-trade) |
| (k) | Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT) paid | Only if the taxable transactions are in the course of business and the resulting income is included under PGBP |
Section 34 — The General Deduction Clause
Replaces Section 37 of the 1961 Act. The residual deduction clause — any expenditure NOT specifically covered by Sections 28–33 or 44–52, which is:
What is NOT covered by Section 34(2)
| Category | Scope |
|---|---|
| Offences / Prohibited by Law | Any expenditure for purposes that are an offence under any Indian or foreign law. Includes bribes, kickbacks, facilitation payments, settlement of regulatory contravention, compounding of offences. Also includes giving benefits/perquisites to professionals in violation of their conduct rules. |
| Corporate Social Responsibility (CSR) | Expenditure under Section 135(5) of Companies Act 2013 — mandatory CSR spend. Not a business deduction, though it may qualify under Section 133 (80G) for charitable donations depending on the cause. |
| Political Party Advertisement | Any advertisement in souvenir, brochure, tract, pamphlet or similar publication of a political party. |
Section 35 — Amounts Not Deductible
Replaces Sections 40 and 40A of the 1961 Act. Overrides all other provisions — these are always disallowed.
| Situation | Disallowance | Recovery |
|---|---|---|
| TDS on resident payee not deducted OR deducted but not paid by ITR due date | 30% | 30% allowed in the year TDS is actually paid |
| TDS on non-resident / foreign company (interest, royalty, FTS) — not deducted or not paid | 100% | Full amount allowed in year TDS is actually paid |
| Section 398(2) escape (payee paid own tax, CA certificate) — treated as TDS paid on date payee filed return | Allowed | No disallowance — deemed deducted on date payee filed ITR |
Section 35(e) — Partner Salary & Interest Limits (Firms)
| Payment Type | Maximum Allowed |
|---|---|
| Interest to any partner | Maximum 12% per annum simple interest on capital. As authorised by partnership deed. Not for periods prior to partnership deed. |
| Salary/remuneration to working partners | On first ₹6,00,000 book profit (or loss): higher of ₹3,00,000 or 90% of book profit; On balance book profit: 60%. Must be authorised by partnership deed. |
| Salary/remuneration to non-working partners | Nil — not allowed at all |
"Book profit" = net profit per P&L account computed as per Chapter IV-D, increased by aggregate partner remuneration already deducted.
Section 36 — Excessive Payments & Cash Payment Disallowance
Section 36(2) — Excessive / Unreasonable Payments to Specified Persons
Where any expenditure is paid to a specified person and is excessive or unreasonable having regard to (a) FMV of goods/services, (b) legitimate business needs, or (c) benefit to assessee — the Assessing Officer may disallow the excessive portion.
Specified persons: relatives of individual; directors (or relatives) of a company; partners (or relatives) of a firm; members (or relatives) of AOP/HUF; any person with 20%+ voting power or profit-sharing interest.
Section 36(4) — Cash Payment Disallowance (₹10,000 Limit)
Any payment or aggregate of payments to a single person in a single day exceeding ₹10,000 that is made by cash (not through specified banking/online mode) — is disallowed as a deduction.
| Transaction Type | Cash Limit |
|---|---|
| General business payments | ₹10,000 per person per day |
| Payment for plying, hiring, or leasing of goods carriages | ₹35,000 per person per day |
Retroactive disallowance [Section 36(5)]: If a liability was previously allowed as a deduction and the payment is subsequently made in cash exceeding the limit — the cash payment is deemed income in the year of payment.
Section 36(9): MTM losses are not deductible under any general or specific provision except as allowed under ICDS per Section 32(h).
Section 37 — Actual Payment Basis Deductions
Replaces Section 43B of the 1961 Act. The following payments are deductible only in the year of actual payment — regardless of the method of accounting or year of accrual.
| Clause | Payment Type | Notes |
|---|---|---|
| (a) | Tax, duty, cess, surcharge or fees under any law (GST, customs, excise, entry tax, profession tax etc.) | "Sum payable" = liability incurred even if not due under the law in that year |
| (b) | Employer's contribution to PF, superannuation fund, gratuity fund, or any employee welfare fund | Allowed if paid on or before due date of ITR [Section 37(3)] — a significant relaxation vs 1961 Act |
| (c) | Leave encashment payable to employees | Deductible only when actually paid to the employee |
| (d) | Bonus and commission [Section 32(a)] | Paid to employee for services rendered |
| (e) | Interest on loans/advances/borrowings from specified financial entities (banks, PFIs, SFCs, SIICs, NBFCs) | If converted to loan/debenture — deemed NOT paid. "Specified financial entities" defined in Section 37(7). |
| (f) | Amount payable to Indian Railways for use of railway assets | |
| (g) | Amounts payable to MSME (micro/small enterprises) beyond the time limit under MSMED Act, 2006 | New addition: If not paid within MSMED time limit → disallowed in year of accrual, deductible only when actually paid. Section 37(3) grace period (ITR due date) does NOT apply to clause (g). |
For items (a) to (f) above — if payment is made after the end of the tax year but on or before the due date of filing the return (31st October for audit cases, 31st July otherwise), the deduction is allowed in the year the liability was incurred. This is a significant practical relief — you can pay GST dues, PF, etc. after year-end but before ITR due date and still get the deduction for that year.
Section 38 — Deemed Profits and Gains
Replaces Section 41 of the 1961 Act. Certain receipts and savings are treated as deemed income even if the business has closed.
| Clause | Deemed Profit Situation | Amount Taxable |
|---|---|---|
| (a) | Remission or cessation of trading liability for which deduction was previously allowed (including unilateral write-off by assessee) | Full value of benefit in year it accrues |
| (b) | Balancing charge on sale of tangible depreciable asset (under Section 33(2) — power sector) — where sale proceeds exceed WDV | Excess of sale proceeds + scrap over WDV, capped at actual cost minus WDV |
| (c) | Sale of scientific research asset without using for other purposes — where sale proceeds + deductions exceed capital expenditure | Lower of excess or deductions allowed |
| (d) | Recovery of previously written-off bad debt in excess of the balance | Amount recovered in excess of the difference |
| (e) | Withdrawal from special reserve [Section 32(e)] by specified entities (banks, housing finance etc.) | Amount withdrawn in the year of withdrawal |
Practical Q&A
| Question | Answer |
|---|---|
| Company paid GST of ₹10L for FY 2026-27 on 30th September 2027 (before ITR due date of 31 Oct 2027). Is it deductible for FY 2026-27? | Yes — Section 37(3) allows deduction in the year of liability if paid on or before ITR due date. ₹10L is deductible for FY 2026-27. |
| Firm paid ₹8 lakh annual salary to a working partner in FY 2026-27 with book profit of ₹5 lakh. How much is allowed? | 90% of ₹5L = ₹4.5L (or ₹3L, whichever higher) = ₹4.5L allowed. ₹3.5L is disallowed under Section 35(e). |
| Company incurred ₹50L on mandatory CSR activities. Is this deductible as business expenditure? | No — Section 34(2)(b) explicitly excludes CSR expenditure. It may partially qualify as donation under Section 133 (80G) if directed to eligible institutions. |
| A supplier's bill of ₹25,000 was paid in cash. Is it deductible? | No — Section 36(4) disallows any payment exceeding ₹10,000 per person per day made in cash. The entire ₹25,000 is disallowed. |
| TDS on a contractor's bill of ₹5L not deducted by 31st July. What is the disallowance? | 30% × ₹5L = ₹1.5L disallowed for FY 2026-27. When TDS is eventually deducted and paid, ₹1.5L is allowed in that subsequent year. |
| A supplier's liability of ₹2L was allowed as deduction in FY 2024-25. In FY 2026-27 the supplier agrees to waive ₹1L of this. Tax treatment? | The ₹1L waiver is a remission of a previously deducted trading liability — deemed income under Section 38(1)(a) in FY 2026-27. |