In order to make income, businesses and professionals incur several expenses. Many of the legitimate business expenses can be deducted from the taxpayer’s income before it is taxed. Good management of a business must include efficient management of the company’s tax liabilities, maximising the allowable deductions and minimising the obligations within the boundaries of the law. Therefore, taking advantage of allowable tax deductions can be very beneficial to small business owners and professionals.
Tax deductions are allowed to businesses and professionals on all the expenses which are revenue in nature.
Depreciation on assets is considered an expense for business and can be claimed as a tax deduction. For calculating depreciation, depreciable assets are categorized into blocks which have prescribed rates for depreciation.
Table Showing Blocks of Depreciable Assets and Rates of Depreciation
|Furniture and fittings||10|
|Plant and machinery||Varies between|
15 and 100
Businesses involved in the manufacture or production of any article or thing get a tax benefit in the form of investment allowance.
Losses can be carried forward and set off against income from the subsequent year(s) for periods set out in the following table:
|Types of losses||Time limit|
|Business losses (other than speculation business losses)||8 years|
|Speculation business losses||4 years|
|Capital losses||8 years|
There are no provisions in India for carrying losses back to earlier years.
Certain expenses are incurred by taxpayers either before starting a business or after starting a business, in connection with the extension of the industrial undertaking, or in connection with setting up a new unit. One-fifth of such expenditure is allowed as a deduction each year, over a period of first five years.
With a view to providing an impetus to start-ups and to facilitate their growth in the initial phase of their business, a deduction of 100% of the profits and gains derived by an eligible start-up from a business involving innovation development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property (IP) will be available.
The benefit of 100% deduction of the profits derived from such business shall be available for a period of three consecutive years out of five years beginning from the year the start-up is incorporated.
Eligible start-up companies can carry forward losses and set off against income of the previous year only if all the shareholders holding shares in the prior year in which such loss was incurred continued to hold those shares in the year of the set off as well. Further, only the losses incurred during the period of seven years beginning from the year in which such company was incorporated may be used for set off. This will be effective from the tax year 2018/19 onwards.
‘Eligible start-up’ means a company or an LLP engaged in the business mentioned above and which fulfils the following conditions, namely:
To provide relief to newly set-up Indian companies, a beneficial CIT rate of 25% (plus applicable surcharge and Education cess) has been announced with effect from FY 2016/17. This beneficial rate is at the option of the company and is applicable on the satisfaction of the following conditions, cumulatively:
For companies other than Indian companies, the rate of CIT (plus applicable surcharge and Education cess) shall remain unchanged.
Any interest paid by a taxpayer on capital borrowed for the purposes of the taxpayer’s business or profession is tax-deductible without any limit. However, if such interest is paid to certain related persons, then, to the extent the interest payment is considered excessive or unreasonable, the tax officer is empowered to disallow the deduction. If the capital is borrowed for acquiring a capital asset, then interest liability pertaining to the period until the time the asset is put to use cannot be allowed as a tax-deductible expense and will have to be added to the cost of such asset.
There are some specific guidelines for interest deduction being prescribed in ICDS (Income Computation and Disclosure Standards).
Goodwill and commercial brand equity that is acquired in the course of amalgamation are intangible assets entitled to depreciation.
Any charitable contribution made by a company to any charity is allowed as a tax-deductible expense, subject to certain conditions under section 80GGB. The tax deductibility ranges from 50% to 100% of the charitable contribution, depending upon the nature of charity.
The amount of any bad debt, or part thereof, that has been written off as irrecoverable in the accounts of the taxpayer for the year is allowed as a tax-deductible write-off. However, if any part of the sum written off is subsequently recovered, the recovered sum is taxable in the year of recovery.
Expenditure incurred by a taxpayer that is illegal is deemed not to have been incurred for the purposes of the business or profession, and no deduction of such expenditure will be allowed.
Certain expenses, such as, but not limited to, employees’ provident fund dues (i.e. retirement benefit funds), bonus to employees, and interest payable to financial institutions and banks, are allowed as tax-deductible expenses only on actual payment. Tax disallowances are attracted if certain payments are delayed beyond their due dates under the respective laws.
Indian companies can claim a deduction for payments on account of royalties, and for interest and fees for technical or management service provided by foreign affiliates, as long as they are not capital in nature. Such payments are deductible in the year the requisite Withholding tax is paid to the government.
Under the tax law, there are various procedural compliances like the audit of books of accounts, submission of tax returns, the disclosure of particulars of income, etc. that need to be complied with by taxpayers by the respective due dates prescribed therein. Non-compliance/delayed compliances of these procedures attract interest and penal consequences.
Expenditure incurred by a taxpayer on CSR activities mandated under the section 135 of the Companies Act, 2013 is not allowed as a deduction for tax purposes under the Income Tax Act.