Income Tax 2025

Appearance

Section 32: Other deductions ​

32(1) ​

The following amounts shall be allowed as deduction in computing income chargeable under section 26:––

  • (a) bonus or commission paid to an employee for services rendered, but only when such sum would not have been payable to the employee as profits or dividend if it had not been paid as bonus or commission;

  • (b) interest paid in respect of capital borrowed for the purposes of business or profession, where–– (i) interest shall not include interest on capital borrowed for acquisition of an asset, whether capitalised in the books of account or not, for any period beginning from the date the capital was borrowed for acquisition of the asset till the date that asset was first put to use; (ii) recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies fulfilling the conditions as prescribed, shall be deemed to be capital borrowed;

  • (c) contribution paid by a public financial institution to the credit guarantee fund trust for small industries as the Central Government may, by notification, specify;

  • (d) the pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner, as prescribed, where––

    • (i) “discount” means the difference between the amount received or receivable by the infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank issuing the bond, and the amount payable on maturity or redemption of such bond;
    • (ii) “period of life of bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity or redemption of such bond;

  • (e) the amount carried to a special reserve created and maintained by a specified entity, subject to the following conditions:––

    • (i) the deduction shall not exceed 20% of the profits derived from an eligible business computed under the head “Profits and gains of business or profession” before any deductions under this clause; and

    • (ii) when the aggregate of such amounts carried to such reserve account from time to time exceeds twice the amount of paid-up share capital and of general reserves of the specified entity, no deduction shall be allowable on such excess, and for the purposes of this clause,––

    • (A) “specified entity” means—

      • (I) a financial corporation as specified in section 2(72) of the Companies Act, 2013;
      • (II) a financial corporation which is a public sector company;
      • (III) a banking company;
      • (IV) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;
      • (V) a housing finance company; and
      • (VI) any other financial corporation including a public company;

    • (B) “eligible business” means,—

      • (I) in respect of any of the specified entities referred to in clauses (e)(A)(I) to (IV), the business of providing long-term finance for—
        • (a) industrial or agricultural development;
        • (b) development of infrastructure facility in India; or
        • (c) development of housing in India;
      • (II) in respect of the specified entity referred to in clause (e)(A)(V), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and
      • (III) in respect of the specified entity referred to in clause (e)(A)(VI), the business of providing long-term finance for development of infrastructure facility in India;

    • (C) “infrastructure facility” means— (I) an infrastructure facility as defined in Explanation to section 80-IA(4)(i) of the Income-tax Act, 1961 or any other public facility of a similar nature as notified by the Board in this behalf and which fulfils the conditions as prescribed; (II) an undertaking referred to in section 80-IA(4)(ii) or (iii) or (iv) or (vi) of the Income-tax Act, 1961; and (III) an undertaking referred to in section 141(5);

  • (f) any expenditure, not being capital expenditure, incurred by a corporation or a body corporate, by whatever name called, if,—

    • (i) it is constituted or established by a Central Act or State Act or Provincial Act;
    • (ii) it is notified by the Central Government for the purposes of this clause having regard to the objects and purposes of the Act referred to in sub-clause (i); and
    • (iii) the expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or established;

  • (g) the expenditure incurred by a co-operative society engaged in the business of manufacture of sugar, on purchase of sugarcane at a price equal to or less than the price fixed or approved by the Government;

  • (h) marked to market loss or other expected loss as computed as per the income computation and disclosure standards notified under section 276(2) and no deduction or allowance for such loss shall be allowed under any other provision of this Act;

  • (i) any expenditure bona fide incurred by a company for the purpose of promoting family planning amongst its employees, subject to the following conditions:––

    • (i) if such expenditure or any part of it is of capital nature, one-fifth of it shall be deducted for the tax year in which it was incurred and the balance shall be deducted in equal instalments for each of the four immediately succeeding tax years;
    • (ii) the provisions of sections 33(11) and 112(3) shall apply to deduction under this clause as they apply in relation to deductions allowable in respect of depreciation;
    • (iii) the provisions of sections 38(1)(c), 39(4) (Table: Sl. No. 9) and 45(6), shall apply to an asset representing capital expenditure for promoting family planning, to the extent they apply to an asset representing capital expenditure on scientific research;

  • (j) the amount being difference between the cost of animals used for the purposes of the business or profession otherwise than as stock-in-trade, as reduced by the amount realised from the carcasses or animals, where such animals have died or become permanently useless; and

  • (k) the amount paid as securities transaction tax or commodities transaction tax, if––

    • (i) the taxable securities transactions or taxable commodities transactions are entered into the course of the business during the tax year; and
    • (ii) the income arising from such taxable securities transactions or taxable commodities transactions is included in the income computed under the head “Profits and gains of business or profession”.
Explanation

Section Summary: ​

Section 32(1) of the Income Tax Act outlines various deductions allowed while computing income under the head "Profits and Gains of Business or Profession." These deductions cover a wide range of expenses, including employee bonuses, interest on borrowed capital, contributions to specific funds, discounts on zero-coupon bonds, special reserves, and other business-related expenditures. The section ensures that legitimate business expenses are deductible, subject to specific conditions and limits.

Key Changes: ​

  1. Interest on Borrowed Capital: The section clarifies that interest on capital borrowed for acquiring an asset is not deductible until the asset is put to use. This is a significant clarification to prevent premature deductions.
  2. Special Reserve for Specified Entities: A new provision allows specified entities (like financial corporations, banks, and housing finance companies) to deduct up to 20% of profits transferred to a special reserve, subject to certain limits.
  3. Marked-to-Market Losses: The section explicitly allows deductions for marked-to-market losses or expected losses computed under prescribed income computation and disclosure standards.
  4. Family Planning Expenditure: Capital expenditure on family planning initiatives by companies is now deductible over five years, similar to depreciation.

Practical Implications: ​

  1. Businesses: Businesses can claim deductions for a variety of expenses, such as employee bonuses, interest on loans, and contributions to specific funds, provided they meet the conditions outlined.
  2. Specified Entities: Financial institutions and housing finance companies can benefit from deductions for contributions to special reserves, encouraging long-term financing for infrastructure, housing, and industrial development.
  3. Compliance: Taxpayers must ensure that deductions are claimed only for eligible expenses and that supporting documentation is maintained.
  4. Capital Expenditure: Companies promoting family planning among employees can now claim deductions for capital expenditure over five years, similar to depreciation.

Critical Concepts: ​

  1. Zero-Coupon Bond Discount: The discount on a zero-coupon bond is the difference between the issue price and the redemption amount. The deduction is allowed pro-rata over the bond's life.
  2. Marked-to-Market Losses: These are losses calculated based on the current market value of assets, even if they are not yet realized.
  3. Special Reserve: A reserve created by specified entities for long-term financing purposes, with deductions capped at 20% of profits and twice the paid-up share capital and general reserves.
  4. Family Planning Expenditure: Capital expenditure on family planning initiatives is deductible over five years, with one-fifth claimed in the first year and the balance in equal installments over the next four years.

Compliance Steps: ​

  1. Documentation: Maintain records of all expenses claimed as deductions, such as bonus payments, interest on loans, and contributions to special reserves.
  2. Pro-Rata Calculation: For zero-coupon bonds, calculate the pro-rata discount over the bond's life and ensure accurate reporting.
  3. Special Reserve Limits: Ensure that the amount transferred to the special reserve does not exceed 20% of profits or twice the paid-up share capital and general reserves.
  4. Family Planning Expenditure: For capital expenditure on family planning, allocate deductions over five years and maintain records of the expenditure.
  5. Marked-to-Market Losses: Compute losses as per prescribed standards and ensure they are not claimed under any other provision.

Examples: ​

  1. Employee Bonus: A company pays a bonus of ₹10 lakh to an employee for services rendered. The bonus is deductible under Section 32(1)(a) as long as it is not paid as profits or dividends.
  2. Interest on Borrowed Capital: A business borrows ₹50 lakh to purchase machinery. Interest of ₹5 lakh is paid during the year. However, the machinery is not put to use until the next year. The ₹5 lakh interest is not deductible in the current year but can be claimed once the machinery is operational.
  3. Special Reserve: A housing finance company earns a profit of ₹1 crore and transfers ₹20 lakh to a special reserve. The ₹20 lakh is deductible, but if the reserve exceeds twice the paid-up share capital and general reserves, no further deduction is allowed.
  4. Family Planning Expenditure: A company spends ₹5 lakh on capital expenditure for family planning initiatives. It can claim ₹1 lakh in the first year and ₹1 lakh each year for the next four years.

By understanding and applying these provisions, taxpayers can optimize their deductions while ensuring compliance with the law.