General Rule

Sections 30 to 37 of the Income Tax Act cover expenses, which are expressly allowed as deductions while computing business income.

Expenses expressly allowed as deductions against business income broadly include the following:

Expenses incurred in connection with the business of the taxpayer; and
Additional deductions allowable under the Income Tax Act towards specified businesses.

Deductions not covered specifically under Section 30 to Section 36 are covered under Section 37(1) of the Income Tax Act. It includes expenses that are in connection with the business and not in the nature of capital expenses. The onus of proof of the authenticity and genuineness of the expenses being relatable to business is on the taxpayer.

Certain expense types are not deductible or have limited deductibility for Indian tax purposes:

Personal expenses are not deductible;
Penalties and fines other than contractual penalties are not deductible;
Donations to funds and charitable institutions are deductible to the extent of 50% or 100% depending on the nature of the charity. Donations made in cash exceeding INR 2,000 are not deductible;
Expenditure incurred on advertisements published by political parties is not deductible;
Expenditure incurred on corporate social responsibility (CSR) activities are not deductible;
Interest payments to related non-resident entities in excess of 30% of the EBITDA are not deductible (see Sec. 13.2.);
Income tax, as well as surcharge and cess thereon, and wealth tax are not deductible;
Payments made to non-residents on which tax is not withheld or, after withholding, not remitted to the tax authorities on or before the due date for filing the corporate tax return are not deductible;
30% of the payments made to residents on which tax is not withheld or, after withholding, not remitted to the tax authorities on or before the due date for filing the corporate tax return are not deductible;
Payments subject to equalization levy (see Sec. 8.2.1.) on which such levy is not deducted or, after deduction, not remitted to the tax authorities on or before the due date for filing the corporate tax return are not deductible;
Expenditure incurred in cash in excess of INR 10,000 in a day is not deductible;
Expenditure incurred for earning exempt income is not deductible, irrespective of whether any exempt income arises during the year or not (effective 1 April 2022); and
Payments made for any purpose which is an offense under any law in India or outside India or payments made for compounding any such offense are not deductible (effective 1 April 2022). Further, any expenditure incurred to settle any proceedings initiated in relation to the contravention is also not deductible effective 1 April 2024.

Expenses Deductible on an Actual Payment Basis

Certain specified expenses are deductible on actual payment, irrespective of whether the taxpayer follows a cash or an accrual basis of accounting. However, deduction on an accrual basis is allowed if the expenses are paid on or before the due date for filing the corporate tax return. The specified expenses include the following:

Expenses incurred by way of tax, duty, cess, or fee;
Interest on loan or borrowing from a public financial institution, State financial corporation, State industrial investment corporation, or non-banking financial company;
Interest on loan or advance from a scheduled bank or co-operative bank;
Expenses for the use of railway assets, payable to Indian Railways;
Employer’s contribution to social security, superannuation fund, gratuity fund, or any other fund for the welfare of the employees; and
Bonus, commission, or any sum in lieu of any leave at the credit of the employee, payable to employees.

Further, for the following expenses, disallowances are attracted if the payments are delayed beyond their due dates under the respective laws:

Employees’ contribution made by an employer to social security, superannuation fund, gratuity fund, or any other fund for the welfare of the employees; and
Effective 1 April 2023, payments to micro and small enterprises within the due date prescribed under the Micro, Small, and Medium Enterprises Development Act (45 days in case of a written agreement and 15 days in case of no written agreement).

Note: Expenses disallowed in relation to micro and small enterprise payments are allowed to be deducted in the year in which the actual payment is made. However, no allowance in respect of the disallowed employees’ contributions is available in subsequent years even on actual payment.

Powerful Tax Solutions

Tax Rules Engine

Collaboration Tools

Latest Tax News