Comprehensive Guide to Other Business Deductions

Running a business means dealing with dozens of expenses that don’t fit neatly into rent, salaries, or depreciation. What about the premium you pay to insure your shop’s stock against fire? Or the provident fund contribution you deposit every month for your staff? The Income Tax Act has a dedicated basket for these: Section 36, often labelled “Other Deductions” in commerce textbooks. It lists specific business expenses that Parliament has expressly allowed as deductions while computing profits and gains of business or profession, and knowing them well is central to any income tax paper in a B.Com course.

This guide walks through each deduction under Section 36 in the sequence commonly taught, explains the conditions attached to each, and gives practical examples so the concepts stick.

Why section 36 exists 🔗

Section 28 to 44 of the Income Tax Act, 1961 collectively define how “profits and gains of business or profession” are computed. While Sections 30 to 35 deal with rent, repairs, depreciation, and scientific research, Section 36 lists a separate set of allowable expenses ranging from insurance premiums to bad debts. These are specific, meaning each clause has its own conditions, and an expense must satisfy those conditions exactly to qualify. If it doesn’t fit any clause of Section 36, a business can still try to claim it as a general deduction under Section 37, provided it is incurred wholly and exclusively for business purposes.

Insurance premiums as a deductible expense 🔗

Section 36(1)(i) and its related sub-clauses allow deductions for three types of insurance premiums, and each has a distinct purpose.

Insurance on stock-in-trade 🔗

Businesses that hold high-value inventory, jewellers, textile traders, electronics dealers, often insure their stock against fire, theft, or flood damage. The premium paid for this cover is fully deductible as a business expense. The logic is simple: protecting the very asset that generates business income is itself a cost of doing business.

Insurance on the life of cattle 🔗

This is a narrower provision aimed at dairy cooperatives. If a federal milk cooperative society pays a premium to insure the cattle owned by members of its affiliated primary societies, that premium is deductible. This clause specifically supports the cooperative dairy model that is common in states like Gujarat and Maharashtra, where primary societies supply milk to a federal cooperative structure.

Health insurance for employees 🔗

Employers who provide group health insurance to their employees can deduct the premium paid, but with one important condition: the payment must be made through any mode other than cash. A cheque, bank transfer, UPI, or card payment qualifies; handing over cash does not. This condition pushes businesses toward traceable, formal payment channels, and it is a favourite exam question because students often forget the “non-cash” rider.

Bonus and commission to employees 🔗

Under Section 36(1)(ii), any bonus or commission paid to employees for services rendered is deductible, including both statutory bonus (governed by the Payment of Bonus Act) and voluntary bonus paid at the employer’s discretion. There are two conditions to keep in mind:

• Not in lieu of dividend: If a company pays its employee-shareholders a “bonus” that is really a disguised dividend distribution, it cannot be claimed as a deduction.
• Section 43B compliance: Bonus and commission are deductible only in the year they are actually paid, not merely provided for in the books. If unpaid at year-end, the deduction shifts to the year of actual payment.

Interest on borrowed capital 🔗

Section 36(1)(iii) allows a deduction for interest paid on capital borrowed for business or professional purposes. This is one of the most frequently tested provisions because of a specific carve-out: if the borrowed funds are used to acquire an asset, interest paid for the period from the date of borrowing until the date the asset is actually put to use cannot be claimed as a revenue deduction. Instead, that interest is capitalised, added to the cost of the asset, and recovered gradually through depreciation. Only interest relating to the period after the asset starts being used qualifies as a straightforward deduction.

For example, if a manufacturing unit borrows money in April to install machinery, and the machinery starts running only in October, the interest for April to September gets added to the machinery’s cost, while interest paid from October onward is deducted directly against that year’s profits.

Discount on zero coupon bonds 🔗

A zero-coupon bond (ZCB) does not pay periodic interest. Instead, it is issued at a discount and redeemed at face value, with the difference representing the investor’s return. Section 36(1)(iiia) allows the issuing company to deduct this discount, but not all at once. The discount is amortised, or spread out, over the life of the bond on a pro-rata basis. This matches the accounting principle that expenses should be recognised in the period they relate to, rather than dumped entirely into the year of issue.

Contributions to provident and superannuation funds 🔗

Employer contributions to a recognised provident fund or an approved superannuation fund are deductible business expenses. Two features define this deduction:

Payment basis, not accrual 🔗

The deduction is allowed only in the year the contribution is actually deposited with the fund, not merely when it becomes due in the books of account. This aligns with Section 43B, which converts several statutory dues, provident fund contributions included, from an accrual basis to a payment basis for deduction purposes.

Employees’ own contributions 🔗

A related provision, Section 36(1)(va), deals with the employee’s share of provident fund or ESI contribution that the employer deducts from salary and holds in trust before depositing it with the relevant authority. This amount must be deposited within the due date specified under the respective welfare legislation, for instance, the 15th of the following month for EPF. Miss that due date, and the deduction is denied outright, even if the amount is deposited later in the same financial year. This is a stricter rule than the one for the employer’s own contribution and is a common source of litigation and disallowance in tax assessments.

Bad debts written off 🔗

Section 36(1)(vii) permits a deduction for any debt, or part of a debt, that becomes irrecoverable during the year and is written off in the books of account. The conditions, as clarified through statutory language and judicial interpretation, are fairly specific:

• The debt must have arisen in the ordinary course of business, such as unpaid trade receivables from a customer.
• It must have been previously offered to tax, meaning the amount was already included in the business’s income in an earlier year, or it represents money lent in the ordinary course of a money-lending business.
• Actual write-off in the accounts is mandatory. A mere provision or estimate for doubtful debts is not enough; the amount must be removed from the “debtors” account, since a general provision does not satisfy this clause, as only debts directly connected to the business and formally written off qualify.
• Capital advances don’t count. If a business advances money to buy an asset like property, and that advance later turns bad, it cannot be claimed under this clause because it was never a trading debt.

Banks and certain financial institutions follow a slightly different regime under Section 36(1)(viia), which allows a deduction for a provision for bad and doubtful debts, in addition to the write-off allowed under clause (vii). This distinction exists because banking businesses carry large loan books where provisioning is a regulatory requirement under RBI norms.

A quick reference table 🔗

Why this matters beyond the exam hall 🔗

These provisions aren’t just theoretical clauses to memorise for a tax paper. Every one of them shapes real decisions: whether a company times its asset purchases carefully, whether an HR team pushes payroll processing to hit provident fund deadlines, or whether a finance manager decides to write off a stale receivable before the financial year closes. Understanding the conditions attached to each deduction is what separates a business that legitimately reduces its tax outgo from one that ends up with disallowances and penalty interest after an assessment.

What do you think? If a business delays depositing an employee’s provident fund contribution by even a week past the due date, should the deduction be denied entirely, or should there be some room for genuine delays? And between capitalising pre-use interest versus expensing it immediately, which approach do you think gives a fairer picture of a company’s yearly profits?

References

1. https://www.incometaxindia.gov.in/w/section-36-24
2. https://cleartax.in/s/section-36-deductions-income-tax-act
3. https://www.coverfox.com/personal-finance/tax/section-36-deductions/
4. https://tax2win.in/guide/section-36-deductions
5. https://www.adityabirlacapital.com/abc-of-money/section-36-deductions-in-income-tax
6. https://carajput.com/blog/deduction-for-bad-debts-explanation-of-section-361vii/