Section 36 of the Income Tax Act, 1961 lists specific deductions allowed against business income, in addition to those under Section 30-35. Below is a structured breakdown:
A. Key Deductions Under Section 36
| CLAUSE | DEDUCTION | CONDITIONS & LIMITS |
| 36(1)(i) | Insurance Premium (Fire, Marine, etc.) | Must be for business assets/stocks |
| 36(1)(ia) | Bonus/Commission to Employees | Paid within 9 months of FY-end (else deductible in actual payment year) |
| 36(1)(ii) | Interest on Borrowed Capital | Must be for business purposes (not personal) |
| 36(1)(iii) | Employer’s Contribution to PF/ESI/NPS | PF/ESI: 100% if paid by due date NPS: Up to 10% of salary (12% for govt. employees) |
| 36(1)(iv) | Employee’s Welfare Funds (e.g., Gratuity, Pension) | Must comply with Payment of Gratuity Act |
| 36(1)(v) | Bad Debts | Must be written off in books & revenue in past |
| 36(1)(vi) | Family Planning Expenditure (for companies) | 1/5th amortized yearly (5 years) |
| 36(1)(vii) | Banking Cash Transaction Tax (BCTT) | Only for banks |
| 36(1)(viii) | Rural Development Bonds | Deduction up to 20% of profits |
| 36(1)(ix) | Securities Transaction Tax (STT) | For traders/investors |
B. Critical Conditions & Restrictions
- Bad Debts (36(1)(vii)):
- Debt must be revenue in nature(not capital).
- Written offin the same FY.
- Excluded: Debts due from related parties without proper documentation.
- Employee Benefits (36(1)(iv)):
- Gratuity fund must be approved by IT authorities.
- Late PF/ESI payments: Deductible only in the year paid (not accrued).
- Interest on Capital (36(1)(iii)):
- Thin Capitalization Rules (Section 94B): Interest to foreign affiliates capped at 30% of EBITDA(for companies with >₹1 crore interest).
1. Insurance Premium on Stocks [Section 36(1)(i)]
Section 36(1)(i) of the Income Tax Act, 1961 allows businesses to claim a deduction for insurance premiums paid to cover the risk of damage or destruction of stock-in-trade. This applies to all businesses and professions where stock is a significant asset .
1. Eligibility & Conditions
✅ Coverage:
- Stock-in-trade(raw materials, finished goods, work-in-progress).
- Stores(packaging materials, spare parts).
✅ Approved Insurer:
- Policy must be from an IRDAI-approved insurer(e.g., GIC, private insurers) .
✅ Payment Mode:
- Premium must be paid via non-cash methods(cheque, bank transfer) .
❌ Exclusions:
- Personal assets or non-business stock.
- Policies not covering stock damage/destruction .
2. Deduction Calculation
- 100% of the premium paidis deductible in the year of payment .
- No upper limit, provided the premium is reasonable and justified.
Example:
- A jeweller pays ₹50,000 to insure gold inventory → Full ₹50,000 is deductible.
3. Compliance Checklist
✔ Maintain insurance policy documents and payment proofs.
✔ Ensure the policy is active during the financial year.
✔ Disclose in Tax Audit Report (Form 3CD) if applicable .
4. Comparison with Other Insurance Deductions
| TYPE | SECTION | COVERAGE | DEDUCTION |
| Stock Insurance | 36(1)(i) | Damage/theft of business stock | 100% |
| Employee Health | 36(1)(ib) | Group health policies | 100% |
| Cattle Insurance | 36(1)(a) | Livestock (for dairy businesses) | 100% |
2. Insurance Premium for Cattle [Section 36(1)(ia)]
Section 36(1)(ia) of the Income Tax Act, 1961 allows Federal Milk Cooperative Societies to claim a deduction for insurance premiums paid on the life of cattle owned by their members. This provision supports rural dairy economies by mitigating financial losses due to cattle mortality.
1. Eligibility & Conditions
✅ Eligible Entities:
- Only Federal Milk Cooperative Societies(not individual farmers or private dairies) .
✅ Coverage:
- Life insurance for cattle(e.g., cows, buffaloes) owned by members of primary milk societies supplying milk to the federal society .
❌ Excluded: Health insurance or policies for non-member cattle .
✅ Approval Requirements:
- Insurer must be IRDAI-approved(e.g., GIC, private insurers) .
- Premiums must be paid via non-cash methods(cheque, bank transfer) .
✅ Documentation:
- Policy documents and member-wise cattle ownership records .
2. Deduction Calculation
- 100% of the premium paidis deductible in the year of payment .
- No monetary cap(unlike earlier limits of ₹12,000/cattle) .
Example:
- A federal society pays ₹1.5 lakh to insure 50 cattle → Full ₹1.5 lakh is deductible.
3. Insurance Premium for Employee Health [Section 36(1)(ib)]
Section 36(1)(ib) allows employers to claim a 100% deduction for health insurance premiums paid for employees under an approved scheme. This encourages businesses to provide healthcare benefits while reducing taxable income.
1. Eligibility & Conditions
✅ Qualifying Payments:
- Group health insurancefor employees (including family coverage).
- Cashless hospitalizationor reimbursement plans.
- Critical illness riders(if part of the main policy).
✅ Approval Requirements:
- Insurer must be IRDAI-registered(e.g., Star Health, ICICI Lombard).
- Policy must be in the employer’s name(not individual employee policies).
❌ Exclusions:
- Life insurance premiums (covered under Section 36(1)(v)).
- Premiums for non-employees(e.g., directors without employment contracts).
2. Deduction Calculation
- 100% deductionin the year of payment.
- No monetary limit, but premiums must be commercially justified.
Example:
- A company pays ₹2 lakh for group health insurance → Full ₹2 lakh is deductible.
3. Compliance & Documentation
✔ Proof Required:
- Insurance policy copy.
- Payment receipts (non-cash).
- Employee enrollment details.
✔ Disclosure:
- Report in Tax Audit Report (Form 3CD)if turnover exceeds ₹1 crore.
4. Bonus or Commission to Employees [Section 36(1)(ii)]
Section 36(1)(ii) allows businesses to claim a deduction for bonus or commission paid to employees as profit-sharing incentives, subject to certain conditions. This includes both statutory bonuses (like Diwali bonus) and discretionary performance incentives.
1. Eligibility & Conditions
✅ Qualifying Payments:
- Bonus: Statutory (e.g., under Payment of Bonus Act) or contractual
- Commission: Performance-linked incentives (percentage of profits/sales)
- Ex-gratia payments(if part of employment terms)
✅ Key Conditions:
- Payment Deadline:
- Must be paid within 9 monthsof the financial year-end (e.g., by 31st December for FY ending 31st March)
- Late payments are deductible only in the year actually paid
- Employment Relationship:
- Must be paid to current employees(not freelancers/directors without employment contracts)
- Documentation:
- Board resolution/employment contract specifying bonus/commission terms
- Payment proofs (bank transfers/cheques)
❌ Exclusions:
- Dividends to shareholders
- Payments to proprietors/partners
- Unreasonable commissions (disallowed u/s 37)
2. Deduction Calculation
- 100% deductionof the amount paid (no monetary cap)
- Disallowanceif unpaid beyond 9 months (deductible in payment year)
Example:
- FY 2023-24 profits: ₹50 lakhs
- Bonus declared: ₹5 lakhs (paid by 31st Dec 2024)
- Deduction: ₹5 lakhs in AY 2025-26
5. Interest on Borrowed Capital [Section 36(1)(iii)]
Section 36(1)(iii) allows businesses to claim deduction for interest paid on capital borrowed for business/profession purposes. This applies to all business entities (companies, firms, sole proprietors).
1. Key Conditions for Deduction
✅ Eligible Interest:
- On loans for business purposes (working capital, asset purchase)
- From banks/NBFCs/private lenders
- Paid or accrued during the year
❌ Non-Deductible Interest:
- Personal loans
- Interest on unpaid taxes
- Interest capitalized into asset cost
2. Special Restrictions
- Thin Capitalization Rules (Section 94B):
- For companies with >₹1 crore interest to foreign affiliates
- Deduction capped at 30% of EBITDA
- Excess carried forward for 8 years
- Cash Transactions:
- Interest >₹10,000 paid in cash disallowed (Section 40A(3))
3. Documentation Required
✔ Loan agreement copy
✔ Interest payment proofs (bank statements)
✔ Purpose declaration (for borrowed funds)
6. Discount on Zero-Coupon Bonds (ZCBs) [Section 36(1)(iiia)]
Section 36(1)(iiia) allows businesses issuing Zero-Coupon Bonds (ZCBs) to claim a deduction for the discount offered on such bonds. The discount is amortized (spread) pro-rata over the bond’s life rather than claimed in a single year .
1. Key Features of Zero-Coupon Bonds
✅ Definition:
- Bonds issued at a discountto face value (e.g., issued at ₹70, redeemable at ₹100 after 5 years).
- No periodic interest payments(unlike traditional bonds) .
✅ Eligible Issuers:
- Infrastructure capital companies/funds
- Public sector companies
- Scheduled banks
- Must be notified by the Central Government.
2. Deduction Rules
| Aspect | Details |
| Deduction Method | Pro-rata amortization over the bond’s life (e.g., ₹30 discount over 5 years → ₹6/year) . |
| Calculation | Annual Deduction= |
| Example | Bond issued at ₹70 (face value ₹100) for 5 years → ₹30 discount → ₹6/year deduction . |
3. Conditions for Deduction
✔ Bond Issuance Date: On or after 1st June 2005 .
✔ No Interim Payments: Bondholders cannot receive benefits before maturity .
✔ Documentation: Maintain bond issuance details and amortization schedules
7. Employer’s Contribution to Recognized Provident Fund (PF) or Approved Superannuation Fund [Section 36(1)(iv)]
1. Overview
Section 36(1)(iv) allows businesses to claim a deduction for employer contributions made to:
- Recognized Provident Funds (RPF)
- Approved Superannuation Funds
- National Pension System (NPS)(for employer’s share)
2. Key Conditions for Deduction
✅ Eligible Contributions:
- Provident Fund: Up to 12% of employee’s basic salary + DA
- Superannuation Fund: Up to 15% of employee’s salary
- NPS (Tier-I): Up to 10% of salary(14% for central govt. employees)
✅ Payment Deadline:
- Must be paid by the due dateunder respective fund rules:
- PF: By 15th of next month
- Superannuation: As per fund rules
- NPS: No strict deadline but should match payroll cycle
❌ Non-Deductible Cases:
- Contributions made after due dates (deductible only in payment year)
- Contributions exceeding statutory limits
- Unapproved funds
3. Special Cases
- Late PF Payments:
- Deductible in year of actual payment (not accrual)
- Subject to penalty under PF Act
- NPS Additional Contributions:
- Employer can contribute beyond 10% but excess not deductible
- Defined Benefit Plans:
- Actuarial valuations required for superannuation funds
4. Documentation Required
✔ PF/Superannuation fund approval proof
✔ Monthly challans for PF payments
✔ Actuarial certificate (for defined benefit plans)
✔ NPS contribution statements
8. Employer’s Contribution to Pension Scheme [Section 36(1)(iva)]
1. Overview
Section 36(1)(iva) allows businesses to claim a deduction for employer contributions made to approved pension schemes (e.g., National Pension System – NPS) for employees.
2. Eligible Contributions
✅ NPS (Tier-I Account):
- Private Sector: Up to 10% of employee’s salary(Basic + DA).
- Government Employees: Up to 14% of salary(as per govt. norms).
✅ Other Approved Pension Funds:
- Superannuation funds registered with Income Tax Department/PFRDA.
❌ Exclusions:
- Contributions to Tier-II NPS accounts(voluntary savings, not deductible).
- Contributions beyond the 10%/14% limit.
3. Key Conditions
✔ Payment Deadline:
- Must be paid during the financial year(no strict due date, but should align with payroll cycle).
- Late payments are deductible only in the year of actual payment.
✔ Employee Eligibility:
- Only for current employees(not ex-employees or freelancers).
✔ Documentation:
- Proof of NPS/Superannuation Fund registration.
- Contribution challans/acknowledgments.
4. Deduction Calculation
| EMPLOYER TYPE | MAXIMUM DEDUCTIBLE CONTRIBUTION | EXAMPLE (EMPLOYEE SALARY = ₹10L) |
| Private Sector | 10% of salary | ₹1,00,000 deductible |
| Government | 14% of salary | ₹1,40,000 deductible |
Note:
- If the employer contributes ₹1.5L(15%) for a private employee:
- ₹1L deductible(10% cap), ₹50K not deductible.
9. Employer’s Contribution to Approved Gratuity Fund [Section 36(1)(v)]
1. Overview
Section 36(1)(v) allows businesses to claim a deduction for employer contributions made to an approved gratuity fund under the Payment of Gratuity Act, 1972.
2. Key Conditions for Deduction
✅ Eligible Contributions:
- Contributions to a fund approved by the Income Tax Department.
- Must comply with the Gratuity Actor company-specific gratuity schemes (if not covered under the Act).
✅ Deduction Limit:
- No fixed % cap(unlike PF/NPS).
- Must be actuarially determined(for defined benefit plans).
- Actual paymentsto the fund are deductible (not just provisions).
❌ Exclusions:
- Contributions to unapproved funds.
- Direct payments to employees (not through an approved fund).
3. Types of Gratuity Funds
| FUND TYPE | APPROVAL REQUIRED? | DEDUCTION RULE |
| Approved Gratuity Fund (AGF) | Yes (IT Dept.) | 100% deduction on contributions |
| Unfunded Gratuity Liability | No (if covered under Gratuity Act) | Deductible only when paid |
| Self-Managed Fund | Must be approved | 100% deduction if actuarially certified |
4. Documentation Required
✔ Proof of Fund Approval (IT Department notification).
✔ Actuarial Valuation Report (for defined benefit plans).
✔ Payment Receipts (bank statements/challans).
✔ Disclosure in Tax Audit Report (Form 3CD) (if applicable).
10. Employee Contributions to Welfare Funds [Section 36(1)(va)]
1. Overview
Section 36(1)(va) governs the tax treatment of employee contributions to welfare funds (e.g., PF, ESI, superannuation) that are deducted from salaries but not deposited on time.
Key Rule:
- Employer must deposit employee contributionsby the due date to claim deduction.
- If delayed → Treated as employer’s incomeand taxed under Section 2(24)(x).
2. Applicable Funds
✅ Provident Fund (PF)
✅ Employees’ State Insurance (ESI)
✅ Superannuation Fund
✅ Any other welfare fund under labor laws
3. Due Dates for Deposit
| FUND | DUE DATE |
| PF | 15th of next month |
| ESI | 15th of next month |
| Superannuation | As per fund rules (typically monthly) |
Example:
- Employee PF contribution (March 2024 salary) → Must be deposited by 15 April 2024.
4. Tax Implications
| SCENARIO | EMPLOYER’S DEDUCTION | EMPLOYEE’S TAXABILITY |
| Deposited by due date | Allowed under Section 36(1)(va) | Not taxable |
| Not deposited by due date | Disallowed → Added to employer’s income under Section 2(24)(x) | Still tax-free for employee |
Late Deposit:
- Deductible only in the year of actual deposit(not accrual).
- Penalty: Additional 15% p.a. under PF Act + tax on disallowed amount.
11. Deduction for Dead or Permanently Useless Animals [Section 36(1)(vi)]
1. Overview
Section 36(1)(vi) allows businesses engaged in animal husbandry, dairy farming, or similar trades to claim a deduction for the loss of animals that are:
- Dead(due to disease, accident, etc.)
- Permanently useless(e.g., injured, infertile, or too old to work)
Purpose: Compensates for the loss of capital assets (animals) used for business.
2. Eligibility & Conditions
✅ Eligible Businesses:
- Dairy farming
- Poultry farming
- Livestock breeding
- Agriculture using animal labor (e.g., bullocks for plowing)
✅ Qualifying Animals:
- Cows, buffaloes, bullocks, horses, sheep, goats, etc.
- Must be used for business(not pets or personal use).
❌ Exclusions:
- Animals sold while still useful (treated as capital gains).
- Losses due to negligence (e.g., lack of proper care).
3. Deduction Calculation
| SCENARIO | DEDUCTION ALLOWED |
| Animal dies | Book value (cost minus depreciation claimed) |
| Animal becomes permanently useless | Written-down value (as per block of assets) |
Example:
- A dairy farmer buys a cow for ₹50,000 (depreciated to ₹30,000). If the cow dies:
- Deduction = ₹30,000(remaining book value).
12. Bad Debts Deduction [Section 36(1)(vii)]
1. Overview
Section 36(1)(vii) allows businesses to claim a deduction for bad debts that have become irrecoverable during the financial year.
Key Conditions:
✅ Must be revenue debts (arising from business activities, not capital loans).
✅ Must be written off in the books of accounts in the same financial year.
✅ Should have been included as income in current or earlier years.
2. Eligibility Criteria
Qualifying Debts:
- Trade receivables (unpaid invoices)
- Loans given in the ordinary course of business (e.g., by banks/NBFCs)
Non-Qualifying Debts:
❌ Personal loans to friends/relatives
❌ Advances for capital assets
❌ Debts not previously recorded as income
3. Documentation Required
✔ Proof of debt (invoices, agreements).
✔ Evidence of irrecoverability (legal notices, insolvency orders).
✔ Board resolution (for companies) or owner’s declaration (for proprietors).
✔ Written-off entry in the books (must be done before filing ITR).
4. Comparison with Other Provisions
| PARAMETER | BAD DEBTS [36(1)(VII)] | DOUBTFUL DEBTS [SECTION 36(1)(VIIA)] |
| Applicability | All businesses | Banks/NBFCs only |
| Deduction | Full write-off | Up to 7.5% of total income (banks) |
| Condition | Must be written off | Provisioning allowed |
13. Provision for Bad and Doubtful Debts (Banks/Financial Institutions) [Section 36(1)(viia)]
1. Overview
Section 36(1)(viia) allows banks and financial institutions to claim a deduction for provisions made towards bad and doubtful debts, subject to specified limits.
2. Eligible Entities
✅ Scheduled Commercial Banks (e.g., SBI, HDFC Bank)
✅ Cooperative Banks
✅ Non-Banking Financial Companies (NBFCs)
❌ Non-Financial Businesses (use Section 36(1)(vii) instead).
3. Deduction Limits
| ENTITY TYPE | DEDUCTION LIMIT | CALCULATION BASE |
| Rural Branches of Banks | Up to 10% of total income | Aggregate average advances made by rural branches |
| Other Banks/NBFCs | Up to 7.5% of total income | Gross total income |
Example:
- A bank with ₹100 crore gross income can claim ₹7.5 crore as a provision.
4. Key Conditions
✔ Provisioning Basis: Must follow RBI guidelines (e.g., NPA classification).
✔ Income Inclusion: Only if the debt was previously recorded as income.
✔ Documentation: Maintain RBI inspection reports and provisioning policies.
5. Comparison with Section 36(1)(vii)
| PARAMETER | PROVISIONING [36(1)(VIIA)] | BAD DEBT WRITE-OFF [36(1)(VII)] |
| Applicability | Banks/NBFCs only | All businesses |
| Deduction | Up to 7.5%/10% of income | 100% of written-off debt |
| Condition | RBI-compliant provisioning | Actual write-off required |
14. Special Reserve for Financial Institutions [Section 36(1)(viii)]
1. Overview
Section 36(1)(viii) allows certain financial institutions to claim a deduction for amounts transferred to a special reserve, subject to specified limits. This encourages capital adequacy and risk management.
2. Eligible Entities
✅ Public Financial Institutions (PFIs) (e.g., IFCI, IDBI)
✅ Scheduled Banks (including cooperative banks)
✅ Non-Banking Financial Companies (NBFCs) engaged in:
- Infrastructure financing
- Housing finance
- Equipment leasing
❌ Regular businesses (not covered under this section).
3. Deduction Limits
| ENTITY TYPE | DEDUCTION LIMIT | CONDITIONS |
| Banks & PFIs | Up to 20% of profits | Must be credited to a special reserve |
| NBFCs | Up to 20% of profits | Only for infrastructure/housing finance NBFCs |
Example:
- An infrastructure NBFC with ₹10 crore profit can transfer ₹2 crore to a special reserve and claim a full deduction.
4. Key Conditions
✔ Reserve Usage: Funds must be used for business purposes (e.g., lending, risk coverage).
✔ Separate Account: Must maintain a distinct “special reserve” in the balance sheet.
✔ Compliance: Follow RBI/SEBI regulations (for banks/NBFCs).
❌ Penalties:
- If the reserve is used for non-business purposes(e.g., dividends), the amount is taxed as income.
15. Deduction for Family Planning Expenditure [Section 36(1)(ix)]
1. Overview
Section 36(1)(ix) allows companies (not individuals or partnerships) to claim a deduction for expenses incurred on family planning programs for employees. The deduction is amortized over 5 years (20% per year).
2. Eligible Expenditure
✅ Medical Costs:
- Sterilization (vasectomy/tubectomy)
- Contraceptives & counseling
- Health camps for family planning
✅ Awareness Programs:
- Workshops/seminars
- Educational materials
❌ Exclusions:
- Expenses for non-employees
- Capital expenditures (e.g., building clinics)
3. Deduction Calculation
- Amortization: 20% of the total expense per year for 5 years.
- Example:
- A company spends ₹5 lakh on a sterilization drive → ₹1 lakh/year deductionfor 5 years.
4. Key Conditions
✔ Only for Companies: LLPs/proprietorships cannot claim this.
✔ Employee-Focused: Must benefit employees (not general public).
✔ Documentation:
- Medical bills
- Program attendance records
- Board resolution approving the initiative
16. Deduction for Securities Transaction Tax (STT) [Section 36(1)(xv)]
1. Overview
Section 36(1)(xv) allows a deduction for Securities Transaction Tax (STT) paid on taxable securities transactions. This applies to traders, investors, and businesses dealing in equities, derivatives, or other securities.
2. Eligible Transactions
✅ Equity Shares (intraday, delivery-based)
✅ Futures & Options (F&O)
✅ Equity-Oriented Mutual Funds (only for equity trades)
✅ Buyback of Shares
❌ Exclusions:
-
- Commodities trading (no STT applicable)
- Debt securities/mutual funds
- Off-market transactions
3. Deduction Rules
| TAXPAYER TYPE | DEDUCTION ALLOWED | CONDITION |
| Business Traders (F&O, intraday) | 100% deduction under PGBP | Must be part of business income |
| Investors (delivery-based) | Not deductible (added to cost of acquisition) | Claimed as cost while calculating capital gains |
Example:
- A day trader pays ₹10,000 as STT → Fully deductibleas business expense.
- An investor pays ₹2,000 STT on delivery trades → Added to purchase cost(reduces capital gains).
4. Key Conditions
✔ Business Income: Only deductible if trading is classified as business income (not capital gains).
✔ Proof Required: Brokerage statements showing STT paid.
✔ No Double Benefit: Cannot claim both deduction and cost adjustment.
5. Comparison with Other Transaction Taxes
| PARAMETER | STT [36(1)(XV)] | COMMODITIES TRANSACTION TAX (CTT) | STAMP DUTY |
| Deduction | Yes (for traders) | No | No |
| Applicability | Equity/F&O | Commodities | Property/legal docs |
| Rate | 0.001%–0.1% | 0.01%–0.05% | State-specific |
17. Deduction for Commodities Transaction Tax (CTT) [Section 36(1)(xvi)]
1. Overview
Section 36(1)(xvi) allows a deduction for Commodities Transaction Tax (CTT) paid on taxable commodities transactions. This applies to traders and businesses dealing in commodity derivatives (futures & options).
2. Eligible Transactions
✅ Commodity Futures (e.g., gold, silver, crude oil)
✅ Commodity Options
✅ Trading on MCX/NCDEX (registered Indian exchanges)
❌ Exclusions:
-
- Physical delivery of commodities (no CTT applicable)
- Equity/currency derivatives (covered under STT)
- Overseas commodity trading
3. Deduction Rules
| TAXPAYER TYPE | DEDUCTION ALLOWED | CONDITION |
| Business Traders (speculative/non-speculative) | 100% deduction under PGBP | Must be part of business income |
| Investors (non-business) | Not deductible (treated as personal expense) | No tax benefit |
Example:
- A trader pays ₹5,000 as CTT → Fully deductibleas a business expense.
- An investor pays ₹1,000 CTT → No deduction(personal cost).
4. Key Conditions
✔ Business Income: Only deductible if trading is classified as business income (not capital gains).
✔ Proof Required: Brokerage statements showing CTT paid.
✔ Exchange-Based: Only applies to trades on Indian commodity exchanges (MCX/NCDEX).
18. Marked-to-Market (MTM) Losses & Expected Losses [Section 36(1)(xviii)]
1. Overview
Section 36(1)(xviii) allows certain financial entities (like banks, insurers, and NBFCs) to claim deductions for:
- Marked-to-market (MTM) losses(unrealized losses on derivatives/securities)
- Other expected losses(e.g., provisions for loan defaults)
Purpose: Aligns tax treatment with accounting standards (Ind AS/IFRS 9).
2. Eligible Entities
✅ Banks (as per RBI norms)
✅ Insurance Companies (IRDAI-regulated)
✅ Systemically Important NBFCs
✅ Mutual Funds
❌ Exclusions:
-
- Regular businesses (unless mandated by accounting standards)
- Unregulated financial entities
3. Deduction Rules
| TYPE OF LOSS | DEDUCTION ALLOWED? | CONDITIONS |
| MTM Losses (Derivatives/Securities) | Yes | Must follow RBI/IRDAI/SEBI guidelines |
| Expected Credit Loss (ECL) Provisions | Yes | As per Ind AS 109/IFRS 9 norms |
| General Provisions | No | Only specific provisions allowed |
Example:
- A bank reports ₹10 crore MTM loss on forex derivatives → Fully deductible.
- An NBFC creates ₹5 crore ECL provision → Deductible if compliant with Ind AS 109.
4. Key Conditions
✔ Regulatory Compliance: Must follow RBI/IRDAI/SEBI norms for provisioning.
✔ Accounting Standards: Applies only if Ind AS/IFRS mandates MTM/ECL recognition.
✔ Documentation:
-
- Audit reports (Form 3CD)
- Regulatory inspection reports
