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March 17, 2018

Which Business Expenses can be Claimed as Tax Deduction

Last Update Date : May 03, 2019
Estimated Read Time: 9 min

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.

Tax Deductible Business Expenses

Expenses incurred wholly for business or profession


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

BlockRate (%)
Residential building5
Office building10
Furniture and fittings10
Plant and machineryVaries between
15 and 100
Intangible assets25

Important Points to Consider

  • The rate of depreciation is limited to 50% if the asset is used for less than 180 days in a year.
  • The money receivable on the transfer of an asset is subject to tax as STCG if it exceeds the opening written down value added to the cost of acquisition of assets falling within the concerned block. STCG tax is applicable on this excess amount at the same tax rate as that applicable to business income.
  • Businesses involved in the manufacturing or production of any article or thing get additional depreciation of 20% on the cost of new plant and machinery (other than ships or aircraft) acquired and installed.
  • Businesses involved in power generation, transmission or distribution also get this additional depreciation benefit of 20%.
  • Depreciation @ 25% is available on the block consisting know-how, patents, licenses, franchises, and similar intangible assets if they are owned and put to use in the course of their business.
  • If there are any new plant and machinery which has been acquired between 1 April 2015 and 31 March 2020, additional depreciation of 35% (as against the current rate of 20%) is available in the year of installation. However, such benefit can be availed only if the machines are installed in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal. Such incentive is not available to specified assets (e.g. office appliances, computer software).
  • Tax depreciation is not required to conform to book depreciation. However, an Accounting Standard mandates companies to reconcile both and provide for deferred tax assets, liabilities, expenses, and incomes.

Investment Allowance

Businesses involved in the manufacture or production of any article or thing get a tax benefit in the form of investment allowance.

Important Points to Consider

  • If the value of new plant and machinery acquired and installed by a taxpayer in a financial year exceeds Rs 25 crores, he can get investment allowance equal to 15% of the actual cost of investment done in such plant and machinery.
  • This benefit actually depends upon the date of installation and not on the date of acquisition. If the installation is done before 31 March 2017, the investment allowance benefit can be availed irrespective of the date of acquisition of plant and machinery.
  • In case installation of the new asset is in a year other than the year of acquisition, then the investment allowance shall be allowed in the year in which the new asset is actually installed. This shall be effective from the tax year 2016/17 to 2017/18. The assets have to be held for more than five years.
  • If the asset is sold before this period, the investment benefit claimed will be reversed in the year of sale.
  • There is no minimum investment limit for acquisition and installation of plant and machinery in the states of Andhra Pradesh, Bihar, Telangana, and West Bengal to avail investment allowance.
  • Investment allowance benefit is not available if the investment is done in the following:
  1. Assets like plant or machinery used earlier in or outside India
  2. Any plant or machinery installed in any office premises or in residential accommodation (or guest house)
  3. Any office appliances (including computers or computer software), vehicle, ship, or aircraft, the cost of which has been allowed as a deduction under any other provision.

Net Operating Losses

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 lossesTime limit
Unabsorbed depreciationPerpetually
Business losses (other than speculation business losses)8 years
Speculation business losses4 years
Capital losses8 years

There are no provisions in India for carrying losses back to earlier years.

Start-up Expenses

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.

Tax Framework for Start-ups in India

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:

  • it is incorporated on or after 1 April 2016 but before 1 April 2019 (Increased from 2019-2021 in Finance Act 2018)
  • the total turnover of its business does not exceed INR 250 million in any of the previous years beginning on or after 1 April 2016 and ending on 31 March 2021, and
  • it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government
  • should not be formed by splitting up or reconstruction of a business already in existence

Reduced rate of tax for newly set-up companies

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:

  • The company is registered and set up on or after 1 March 2016.
  • The company is engaged in any business other than the business of manufacture or production of any article or thing and research or distribution of such article or thing manufactured or produced.
  • The company has not claimed a benefit for establishing its unit in an SEZ, benefit of accelerated depreciation, or benefit of additional depreciation, investment allowances, expenditure on scientific research, and any deduction in respect of certain income.
  • The company has not claimed set-off of loss carried forward from any earlier assessment years, provided such loss is attributable to the deductions referred in (iii) above
  • The option of seeking the benefit of a reduced CIT rate of 25% is furnished in the prescribed manner before the due date of furnishing of income.

For companies other than Indian companies, the rate of CIT (plus applicable surcharge and Education cess) shall remain unchanged.

Interest Expenses

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).

Expenses which are not personal in nature


Goodwill and commercial brand equity that is acquired in the course of amalgamation are intangible assets entitled to depreciation.

  • The amalgamated/demerged company and the resulting company shall not be entitled to claim a deduction for depreciation exceeding the amount calculated in any previous year.
  • The deduction shall be apportioned between the amalgamating/demerging company and the amalgamated/demerged company in the ratio of the number of days for which the assets were used by them during any tax year. However, the issue of whether goodwill is eligible for tax depreciation or not is the subject of litigation, and there are divergent views of courts on this.

Charitable Contributions

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.

Bad Debts

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.

Bribes, Kickbacks and Illegal Payments

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.

Tax Deduction as Business Expenses

Expenses which aren’t capital expenses

Expenses Allowable on Actual Payment Basis

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.

Payments to Foreign Affiliates

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.

Fines and Penalties

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.

Important Points to Consider

  • There are prosecution provisions as well for certain offences. Penalties and fines paid for infraction of, or non-compliance with, any law are not deductible as business expenditure.
  • Prosecution proceedings are criminal proceedings, and, in such proceedings, courts presume a culpable mental state on the taxpayer’s part. The burden of proving beyond all reasonable doubt (and not merely by a preponderance of probability) the absence of such a state is on the taxpayer.
  • Further, a new provision has been included to levy a penalty of Rs 10,000 on specified persons i.e. accountants, registered valuers, or merchant valuers for furnishing incorrect information in any report or certificate furnished by them under any provision of the Act or the Rules. The aforesaid penalty will not be imposable if there is reasonable cause for failure. This will be effective from 1 April 2017 onwards.
  • Further, a new provision has been included to levy a penalty of Rs 5,000 where the taxpayer has filed one’s return of income after the due date but on or before the 31st day of December of the tax year and Rs 10,000 where the taxpayer has filed one’s return of income after the 31st day of December or has not filed one’s return of income.

Expenditure Incurred on Corporate Social Responsibility (CSR) Activities

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.

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CA Chetan Shinde
Chetan is the Lead Tax Advisor at H&R Block (India) with an experience of almost half a decade in audit and taxation. His professional areas of interest are GST advisory and statutory audit. Apart from taxation, he is passionate about social causes and works extensively towards rural school development and literacy.

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