Companies that incur expenses on in-house research and development (R&D) activities can claim tax deductions under the Income Tax Act, 1961. The key provision that facilitates this is Section 35(2AB). What Does Section 35(2AB) Offer? Weighted Deduction:Eligible in-house R&D expenditure can bRead more
Companies that incur expenses on in-house research and development (R&D) activities can claim tax deductions under the Income Tax Act, 1961. The key provision that facilitates this is Section 35(2AB).
What Does Section 35(2AB) Offer?
Weighted Deduction: Eligible in-house R&D expenditure can be claimed at a weighted deduction (commonly 150% of the actual expenditure), effectively reducing taxable income by more than the amount spent.
Eligibility Requirements:
The R&D work must be undertaken in-house and should relate to projects that are approved or fall under the specified categories in the Act.
The expenditure must be incurred wholly and exclusively for research and development purposes.
Proper documentation and record-keeping are essential to substantiate the claim.
How to Claim the Deduction
Maintain Accurate Records:
Keep detailed accounts and receipts of all expenses related to R&D activities.
Ensure that the expenses are segregated clearly in your books of accounts.
Meet the Conditions:
Verify that your R&D projects qualify under Section 35(2AB) by confirming they are in areas eligible for weighted deduction.
Ensure that all conditions laid down in the Act for claiming this deduction are satisfied.
Report in Your Tax Return:
When filing your income tax return, include the R&D expenditure under the appropriate section.
The weighted deduction (e.g., 150% of the actual expenditure) will then be applied, reducing your overall taxable income.
Example Illustration
Imagine your company spends ₹10 lakh on qualifying in-house R&D activities. With a weighted deduction of 150%, you can claim a deduction of:
Deduction Amount: ₹10 lakh x 150% = ₹15 lakh
This additional deduction effectively reduces your taxable income, offering a significant tax benefit.
Key Takeaway
By claiming a weighted deduction for in-house R&D expenses under Section 35(2AB), companies not only support innovation and growth but also optimize their tax liabilities. Ensure you comply with all documentation and eligibility requirements to make the most of this deduction.
The tax treatment of telecom spectrum fees depends largely on the nature of the fee and how it is incurred by the telecom operator. Here’s a breakdown: 1. Nature of the Spectrum Fee Capital Expenditure:Typically, a one-time telecom spectrum fee paid to acquire a long-term license is considered a capRead more
The tax treatment of telecom spectrum fees depends largely on the nature of the fee and how it is incurred by the telecom operator. Here’s a breakdown:
1. Nature of the Spectrum Fee
Capital Expenditure: Typically, a one-time telecom spectrum fee paid to acquire a long-term license is considered a capital expenditure. This means that rather than claiming the entire fee as an immediate deduction, the fee is capitalized as an intangible asset and then amortized over the period of the license.
Amortization: The annual amortization (or depreciation for tax purposes) is allowed under the Income Tax Act. The deduction is spread over the useful life or license period.
Revenue Expenditure: In some cases, if the spectrum fee is structured as a recurring payment (for example, an annual fee), it is treated as a revenue expense and can be deducted in the year it is incurred.
2. Relevant Provisions
Capitalized Costs: When the spectrum fee is capitalized as an intangible asset, it forms part of the company’s balance sheet and is depreciated (amortized) over the life of the asset under the relevant provisions (such as under Section 32 for depreciation on intangible assets).
Matching Principle: The treatment ensures that the expense is matched with the revenue generated over the period in which the telecom services are provided, which is a fundamental concept in accounting and taxation.
3. Practical Implications
Tax Deduction Timing: For a one-time spectrum fee treated as capital expenditure, you will not get a full deduction in the year of payment. Instead, you will claim a part of the fee as a deduction over several years via amortization.
Structuring of Fee: If the fee is designed as a recurring charge, the full amount can be claimed as a deduction in the respective year as a revenue expense.
Conclusion
The tax treatment of a telecom spectrum fee varies based on its structure:
One-time payment for a long-term license is treated as capital expenditure and amortized over the license period.
Recurring fees are treated as revenue expenditure and deducted in the year they are incurred.
By aligning the expense treatment with the nature of the fee, telecom companies can ensure proper matching of expenses with revenues and optimize their tax benefits.
When a business is newly set up, it incurs various preliminary expenses before starting its operations. The Income Tax Act, 1961, allows a deduction for such expenses under Section 35D. What Are Preliminary Expenses? Preliminary expenses include costs incurred before the commencement of business, suRead more
When a business is newly set up, it incurs various preliminary expenses before starting its operations. The Income Tax Act, 1961, allows a deduction for such expenses under Section 35D.
What Are Preliminary Expenses?
Preliminary expenses include costs incurred before the commencement of business, such as: ✔️ Legal and professional fees for drafting the Memorandum & Articles of Association. ✔️ Registration fees paid to the Registrar of Companies. ✔️ Underwriting commission for share issue. ✔️ Cost of feasibility studies, market surveys, or reports.
How Is the Deduction Allowed?
📌 Eligibility: The deduction is available to Indian companies and resident non-corporate assessees. 📌 Amount of Deduction:5% of the cost of the project OR capital employed, whichever is higher. 📌 Manner of Deduction: The allowed preliminary expenses are deductible in 5 equal annual installments starting from the year in which the business commences.
Example:
If a company incurs ₹10 lakh as eligible preliminary expenses, it can claim ₹2 lakh per year for 5 years.
Key Conditions to Remember
✔️ The expenses must be specifically mentioned under Section 35D to qualify for deduction. ✔️ Proper documentation and proof of expenditure are required. ✔️ If the business is not yet operational, the deduction will commence from the year in which it starts functioning
When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses. Key Points to Note: Capital Nature of the Expense:Costs incurred in raising capitRead more
When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses.
Key Points to Note:
Capital Nature of the Expense: Costs incurred in raising capital (by issuing shares or debentures) are treated as capital expenditure. They are part of the process of financing the company and are not directly linked to generating regular business income.
Non-Deductibility Under the Income Tax Act: Since these expenses are capital in nature, they are not allowed as a deduction when computing taxable income. In other words, you cannot reduce your current year’s taxable profits by the amount spent on issuing shares or debentures.
Treatment as Capital Expenditure: Instead of a direct deduction, such expenses may be capitalized. Depending on the applicable accounting and tax provisions, they might be written off over a period through amortization or depreciation if the law permits, but they are not deducted immediately as a revenue expense.
Relevant Provisions:
Section 37 of the Income Tax Act, 1961: This section generally allows deductions for revenue expenses incurred wholly and exclusively for business purposes. However, since the issuance expenses are of a capital nature, they do not qualify under this provision.
Conclusion:
In summary, the expenditure incurred on issuing shares or debentures is treated as a capital expense and is not allowed as a deduction in the current year under the Income Tax Act. It does not directly reduce your taxable income.
When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act. What You Need to Know Relevant Provision:The deduction is provided under Section 35DD of the Income Tax Act, 1961. Eligibility: Only IRead more
When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act.
What You Need to Know
Relevant Provision: The deduction is provided under Section 35DD of the Income Tax Act, 1961.
Eligibility:
Only Indian companies that incur expenditure wholly and exclusively for amalgamation or demerger qualify.
The expenses must be directly related to the restructuring process.
How the Deduction Works:
The entire expenditure is not deductible in a single year. Instead, it is spread out over five consecutive financial years.
This means you can claim 20% of the total expenditure each year as a deduction.
Step-by-Step Illustration
Expenditure Incurred: Suppose your company incurs ₹50 lakhs in amalgamation/demerger expenses during the financial year.
Annual Deduction:
Claim 20% of ₹50 lakhs = ₹10 lakhs per year.
Deduction Period:
You will get this deduction each year for five financial years (i.e., ₹10 lakhs per year for 5 years).
Important Considerations
Documentation: It is essential to maintain proper documentation and records that demonstrate the expenses were incurred solely for amalgamation or demerger purposes.
Exclusivity: No other tax deduction is available for these expenses under any other section. This is the only relief provided for amalgamation/demerger costs.
Key Takeaway
By spreading the deduction over five years, Section 35DD helps ease the tax burden on companies undergoing corporate restructuring, making it more manageable to recover the costs associated with amalgamation or demerger.
Expenditure incurred on Voluntary Retirement Scheme (VRS) is allowed as a deduction under Section 35DDA in a phased manner, rather than a one-time deduction. ✅ Deduction Allowed under Section 35DDA The total amount of VRS compensation paid to employees is allowed as a deduction over 5 years. 20% ofRead more
Expenditure incurred on Voluntary Retirement Scheme (VRS) is allowed as a deduction under Section 35DDA in a phased manner, rather than a one-time deduction.
✅ Deduction Allowed under Section 35DDA
The total amount of VRS compensation paid to employees is allowed as a deduction over 5 years.
20% of the total VRS expense is deductible each year for five consecutive years, starting from the year in which the payment is made.
Deduction is available only if the payment is actually made to the employees opting for voluntary retirement.
⛔ When Deduction is NOT Allowed?
❌ If the business fails to make the payment to employees, deduction is not allowed. ❌ If the business claims the entire amount in one year, the excess claim may be disallowed by tax authorities. ❌ If the employee retires under any scheme other than VRS, this section does not apply.
As per Section 36(1)(ii), any bonus or commission paid to employees is allowed as a deduction while computing business income, provided it meets certain conditions. ✅ Conditions for Allowing Deduction 🔹 Must be paid to an employee – The payment should be made to an employee and not to proprietors, pRead more
As per Section 36(1)(ii), any bonus or commission paid to employees is allowed as a deduction while computing business income, provided it meets certain conditions.
✅ Conditions for Allowing Deduction
🔹 Must be paid to an employee – The payment should be made to an employee and not to proprietors, partners, or directors who are also shareholders. 🔹 Should not be in lieu of dividends – If the commission or bonus is paid instead of distributing profits as dividends, the deduction is not allowed. 🔹 Actual payment is required – As per Section 43B, the deduction is allowed only when the bonus or commission is actually paid before the due date of filing the income tax return. 🔹 Should be reasonable – The payment should be genuine and reasonable as per the business needs; otherwise, tax authorities may disallow it under Section 40A(2) (excessive or unreasonable payments).
⛔ When Deduction is NOT Allowed?
❌ If the bonus/commission is payable instead of a dividend to shareholders. ❌ If the payment is not actually made by the due date of filing the return. ❌ If the amount is considered excessive by tax authorities under Section 40A(2).
💡 Illustration
Example 1: XYZ Pvt Ltd pays ₹2 lakh as a performance-based commission to its employees. Since the payment is made to employees and is not in lieu of dividends, it is allowed as a deduction under Section 36(1)(ii).
Example 2: ABC Ltd pays ₹10 lakh to its shareholder-directors in the form of commission instead of dividends. Since this is effectively a profit distribution, it is not allowed as a deduction.
📌 Conclusion
✅ Bonus/commission paid to genuine employees is deductible under Section 36(1)(ii). ✅ The payment should not be an alternative to dividends. ✅ Deduction is available only on actual payment before the ITR due date. ✅ Ensure payments are reasonable to avoid disallowance under Section 40A(2).
💡 Proper documentation and adherence to these provisions ensure maximum tax benefits! 🚀
1️⃣ General Provision for Deduction of Interest As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, specRead more
1️⃣ General Provision for Deduction of Interest
As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, special rules apply.
2️⃣ When is the Deduction Allowed?
✔️ If the capital is borrowed for acquiring a capital asset, the interest expense can be deducted, but the timing of deduction depends on the asset’s usage status:
📌 Before the asset is put to use:
Interest incurred up to the date when the asset is first put to use is not allowed as an immediate deduction.
Instead, it is capitalized and added to the cost of the asset.
This capitalized interest becomes part of the depreciable cost of the asset and is claimed as depreciation over time.
📌 After the asset is put to use:
Interest paid on the borrowed capital after the asset is put to use is allowed as a deduction in the year in which it is incurred.
3️⃣ Special Cases & Exceptions
💡 For House Property (Section 24(b))
Interest on capital borrowed for purchasing, constructing, repairing, or reconstructing a house property is deductible under Section 24(b) as follows: ✅ For self-occupied property: Up to ₹2,00,000 per annum. ✅ For let-out property: Full interest is deductible.
💡 For Capital Gains Computation
If capital is borrowed for acquiring a capital asset (not for business use), the interest paid before the transfer of the asset is added to the cost of acquisition under Section 48 while computing capital gains.
4️⃣ Illustration
🔹 Example 1 (Business Asset): A company borrows ₹50 lakh for purchasing machinery. The machine is installed after one year. The interest for the first year is capitalized, while later interest is deducted from business income.
🔹 Example 2 (House Property): Mr. X takes a home loan of ₹30 lakh at 8% interest. He can claim ₹2 lakh per annum under Section 24(b) if the house is self-occupied.
5️⃣ Conclusion
✅ Interest deduction depends on whether the capital asset is put to use. ✅ Before use – Interest is capitalized; After use – Interest is deductible. ✅ Special provisions apply to house property and capital gains computation.
Understanding these provisions ensures maximum tax benefits while acquiring capital assets using borrowed funds! 🚀
What is a Zero Coupon Bond? A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity. Key Features of Zero Coupon BondsRead more
What is a Zero Coupon Bond?
A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity.
Key Features of Zero Coupon Bonds
✅ Issued at a Discount: Bought at a lower price and redeemed at full value. ✅ No Interest Payments: Unlike regular bonds, there are no periodic interest payments. ✅ Fixed Maturity Value: Investors receive a pre-determined lump sum at maturity. ✅ Government or Corporate Issuance: Can be issued by the government, public sector undertakings (PSUs), or private companies.
Example
If a Zero Coupon Bond has a face value of ₹10,000 and is issued at ₹7,000, the investor earns a return of ₹3,000 (₹10,000 – ₹7,000) upon maturity.
Taxation of Zero Coupon Bonds in India
📌 As Capital Gains (For Investors Holding as an Investment)
The difference between redemption value and purchase price is taxed as capital gains.
Short-Term Capital Gains (STCG) – If sold within 12 months (listed ZCBs) or 36 months (unlisted ZCBs), gains are taxed as per slab rates.
Long-Term Capital Gains (LTCG) – If held beyond the respective period, LTCG tax applies at 10% without indexation under Section 112.
📌 As Business Income (For Traders or Companies)
If ZCBs are held as stock-in-trade, the gain is taxable as business income under Section 28.
📌 Tax Deducted at Source (TDS)
TDS may be applicable under Section 193 when the bond matures if issued by a company or financial institution.
Government-Notified Zero Coupon Bonds
As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax treatment, where the gain is taxed only on maturity and not annually.
Conclusion
Zero Coupon Bonds are an attractive option for long-term investors looking for fixed returns. However, investors should consider capital gains taxation and TDS provisions while investing in these instruments.
Tax Treatment of Zero Coupon Bonds under the Income Tax Act 1. What are Zero Coupon Bonds? Zero Coupon Bonds (ZCBs) are debt instruments issued at a discount to their face value but do not pay periodic interest. Instead, the investor earns a return when the bond is redeemed at its maturity value, whRead more
Tax Treatment of Zero Coupon Bonds under the Income Tax Act
1. What are Zero Coupon Bonds?
Zero Coupon Bonds (ZCBs) are debt instruments issued at a discount to their face value but do not pay periodic interest. Instead, the investor earns a return when the bond is redeemed at its maturity value, which is higher than the purchase price.
2. Taxation of Zero Coupon Bonds
✅ For Individual & Non-Business Holders:
The difference between the redemption value and the purchase price is treated as Capital Gains.
Holding Period Classification:
Short-Term Capital Gains (STCG): If held for ≤ 12 months (for listed ZCBs) or ≤ 36 months (for unlisted ZCBs), taxed as per slab rates.
Long-Term Capital Gains (LTCG): If held for > 12 months (for listed ZCBs) or > 36 months (for unlisted ZCBs), taxed at 10% without indexation under Section 112.
✅ For Businesses & Traders (Held as Stock-in-Trade):
Any gain on maturity is treated as business income under Section 28 and taxed at applicable slab rates.
✅ TDS Applicability:
If the ZCB is issued by a company or institution, TDS (Tax Deducted at Source) may apply at the time of maturity under Section 193, unless exempted.
3. Special Tax Treatment for Government-Notified ZCBs
As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax benefits.
The difference between issue and redemption price is not taxed annually but only on maturity as capital gains.
4. Practical Considerations
✔ Keep records of purchase price & redemption value for accurate tax computation. ✔ If investing in listed ZCBs, take advantage of the lower holding period for LTCG. ✔ Ensure TDS compliance if applicable.
How to claim deduction of expenses incurred on in house research and development activities?
Companies that incur expenses on in-house research and development (R&D) activities can claim tax deductions under the Income Tax Act, 1961. The key provision that facilitates this is Section 35(2AB). What Does Section 35(2AB) Offer? Weighted Deduction:Eligible in-house R&D expenditure can bRead more
Companies that incur expenses on in-house research and development (R&D) activities can claim tax deductions under the Income Tax Act, 1961. The key provision that facilitates this is Section 35(2AB).
What Does Section 35(2AB) Offer?
Weighted Deduction:
Eligible in-house R&D expenditure can be claimed at a weighted deduction (commonly 150% of the actual expenditure), effectively reducing taxable income by more than the amount spent.
Eligibility Requirements:
The R&D work must be undertaken in-house and should relate to projects that are approved or fall under the specified categories in the Act.
The expenditure must be incurred wholly and exclusively for research and development purposes.
Proper documentation and record-keeping are essential to substantiate the claim.
How to Claim the Deduction
Maintain Accurate Records:
Keep detailed accounts and receipts of all expenses related to R&D activities.
Ensure that the expenses are segregated clearly in your books of accounts.
Meet the Conditions:
Verify that your R&D projects qualify under Section 35(2AB) by confirming they are in areas eligible for weighted deduction.
Ensure that all conditions laid down in the Act for claiming this deduction are satisfied.
Report in Your Tax Return:
When filing your income tax return, include the R&D expenditure under the appropriate section.
The weighted deduction (e.g., 150% of the actual expenditure) will then be applied, reducing your overall taxable income.
Example Illustration
Imagine your company spends ₹10 lakh on qualifying in-house R&D activities. With a weighted deduction of 150%, you can claim a deduction of:
Deduction Amount: ₹10 lakh x 150% = ₹15 lakh
This additional deduction effectively reduces your taxable income, offering a significant tax benefit.
Key Takeaway
By claiming a weighted deduction for in-house R&D expenses under Section 35(2AB), companies not only support innovation and growth but also optimize their tax liabilities. Ensure you comply with all documentation and eligibility requirements to make the most of this deduction.
See lessWhat is the tax treatment of telecom spectrum fee?
The tax treatment of telecom spectrum fees depends largely on the nature of the fee and how it is incurred by the telecom operator. Here’s a breakdown: 1. Nature of the Spectrum Fee Capital Expenditure:Typically, a one-time telecom spectrum fee paid to acquire a long-term license is considered a capRead more
The tax treatment of telecom spectrum fees depends largely on the nature of the fee and how it is incurred by the telecom operator. Here’s a breakdown:
1. Nature of the Spectrum Fee
Capital Expenditure:
Typically, a one-time telecom spectrum fee paid to acquire a long-term license is considered a capital expenditure. This means that rather than claiming the entire fee as an immediate deduction, the fee is capitalized as an intangible asset and then amortized over the period of the license.
Amortization: The annual amortization (or depreciation for tax purposes) is allowed under the Income Tax Act. The deduction is spread over the useful life or license period.
Revenue Expenditure:
In some cases, if the spectrum fee is structured as a recurring payment (for example, an annual fee), it is treated as a revenue expense and can be deducted in the year it is incurred.
2. Relevant Provisions
Capitalized Costs:
When the spectrum fee is capitalized as an intangible asset, it forms part of the company’s balance sheet and is depreciated (amortized) over the life of the asset under the relevant provisions (such as under Section 32 for depreciation on intangible assets).
Matching Principle:
The treatment ensures that the expense is matched with the revenue generated over the period in which the telecom services are provided, which is a fundamental concept in accounting and taxation.
3. Practical Implications
Tax Deduction Timing:
For a one-time spectrum fee treated as capital expenditure, you will not get a full deduction in the year of payment. Instead, you will claim a part of the fee as a deduction over several years via amortization.
Structuring of Fee:
If the fee is designed as a recurring charge, the full amount can be claimed as a deduction in the respective year as a revenue expense.
Conclusion
The tax treatment of a telecom spectrum fee varies based on its structure:
One-time payment for a long-term license is treated as capital expenditure and amortized over the license period.
Recurring fees are treated as revenue expenditure and deducted in the year they are incurred.
By aligning the expense treatment with the nature of the fee, telecom companies can ensure proper matching of expenses with revenues and optimize their tax benefits.
See lessHow to get deduction of preliminary expenses under Income Tax Act
When a business is newly set up, it incurs various preliminary expenses before starting its operations. The Income Tax Act, 1961, allows a deduction for such expenses under Section 35D. What Are Preliminary Expenses? Preliminary expenses include costs incurred before the commencement of business, suRead more
When a business is newly set up, it incurs various preliminary expenses before starting its operations. The Income Tax Act, 1961, allows a deduction for such expenses under Section 35D.
What Are Preliminary Expenses?
Preliminary expenses include costs incurred before the commencement of business, such as:
✔️ Legal and professional fees for drafting the Memorandum & Articles of Association.
✔️ Registration fees paid to the Registrar of Companies.
✔️ Underwriting commission for share issue.
✔️ Cost of feasibility studies, market surveys, or reports.
How Is the Deduction Allowed?
📌 Eligibility: The deduction is available to Indian companies and resident non-corporate assessees.
📌 Amount of Deduction: 5% of the cost of the project OR capital employed, whichever is higher.
📌 Manner of Deduction: The allowed preliminary expenses are deductible in 5 equal annual installments starting from the year in which the business commences.
Example:
If a company incurs ₹10 lakh as eligible preliminary expenses, it can claim ₹2 lakh per year for 5 years.
Key Conditions to Remember
✔️ The expenses must be specifically mentioned under Section 35D to qualify for deduction.
See less✔️ Proper documentation and proof of expenditure are required.
✔️ If the business is not yet operational, the deduction will commence from the year in which it starts functioning
Is expenditure incurred on issue of shares/debenture allowed under income tax act?
When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses. Key Points to Note: Capital Nature of the Expense:Costs incurred in raising capitRead more
When a company incurs costs for issuing shares or debentures—such as underwriting fees, printing expenses, and other related costs—these expenses are generally considered capital in nature rather than revenue expenses.
Key Points to Note:
Capital Nature of the Expense:
Costs incurred in raising capital (by issuing shares or debentures) are treated as capital expenditure. They are part of the process of financing the company and are not directly linked to generating regular business income.
Non-Deductibility Under the Income Tax Act:
Since these expenses are capital in nature, they are not allowed as a deduction when computing taxable income. In other words, you cannot reduce your current year’s taxable profits by the amount spent on issuing shares or debentures.
Treatment as Capital Expenditure:
Instead of a direct deduction, such expenses may be capitalized. Depending on the applicable accounting and tax provisions, they might be written off over a period through amortization or depreciation if the law permits, but they are not deducted immediately as a revenue expense.
Relevant Provisions:
Section 37 of the Income Tax Act, 1961:
This section generally allows deductions for revenue expenses incurred wholly and exclusively for business purposes. However, since the issuance expenses are of a capital nature, they do not qualify under this provision.
Conclusion:
In summary, the expenditure incurred on issuing shares or debentures is treated as a capital expense and is not allowed as a deduction in the current year under the Income Tax Act. It does not directly reduce your taxable income.
See lessHow to get deduction of expenditure incurred in case of amalgamation/demerger?
When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act. What You Need to Know Relevant Provision:The deduction is provided under Section 35DD of the Income Tax Act, 1961. Eligibility: Only IRead more
When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act.
What You Need to Know
Relevant Provision:
The deduction is provided under Section 35DD of the Income Tax Act, 1961.
Eligibility:
Only Indian companies that incur expenditure wholly and exclusively for amalgamation or demerger qualify.
The expenses must be directly related to the restructuring process.
How the Deduction Works:
The entire expenditure is not deductible in a single year. Instead, it is spread out over five consecutive financial years.
This means you can claim 20% of the total expenditure each year as a deduction.
Step-by-Step Illustration
Expenditure Incurred: Suppose your company incurs ₹50 lakhs in amalgamation/demerger expenses during the financial year.
Annual Deduction:
Claim 20% of ₹50 lakhs = ₹10 lakhs per year.
Deduction Period:
You will get this deduction each year for five financial years (i.e., ₹10 lakhs per year for 5 years).
Important Considerations
Documentation:
It is essential to maintain proper documentation and records that demonstrate the expenses were incurred solely for amalgamation or demerger purposes.
Exclusivity:
No other tax deduction is available for these expenses under any other section. This is the only relief provided for amalgamation/demerger costs.
Key Takeaway
By spreading the deduction over five years, Section 35DD helps ease the tax burden on companies undergoing corporate restructuring, making it more manageable to recover the costs associated with amalgamation or demerger.
See lessWhat id the deduction of expenditure incurred on VRS?
Expenditure incurred on Voluntary Retirement Scheme (VRS) is allowed as a deduction under Section 35DDA in a phased manner, rather than a one-time deduction. ✅ Deduction Allowed under Section 35DDA The total amount of VRS compensation paid to employees is allowed as a deduction over 5 years. 20% ofRead more
Expenditure incurred on Voluntary Retirement Scheme (VRS) is allowed as a deduction under Section 35DDA in a phased manner, rather than a one-time deduction.
✅ Deduction Allowed under Section 35DDA
The total amount of VRS compensation paid to employees is allowed as a deduction over 5 years.
20% of the total VRS expense is deductible each year for five consecutive years, starting from the year in which the payment is made.
Deduction is available only if the payment is actually made to the employees opting for voluntary retirement.
⛔ When Deduction is NOT Allowed?
❌ If the business fails to make the payment to employees, deduction is not allowed.
See less❌ If the business claims the entire amount in one year, the excess claim may be disallowed by tax authorities.
❌ If the employee retires under any scheme other than VRS, this section does not apply.
Is bonus or commission given to employees allowed as deduction?
As per Section 36(1)(ii), any bonus or commission paid to employees is allowed as a deduction while computing business income, provided it meets certain conditions. ✅ Conditions for Allowing Deduction 🔹 Must be paid to an employee – The payment should be made to an employee and not to proprietors, pRead more
As per Section 36(1)(ii), any bonus or commission paid to employees is allowed as a deduction while computing business income, provided it meets certain conditions.
✅ Conditions for Allowing Deduction
🔹 Must be paid to an employee – The payment should be made to an employee and not to proprietors, partners, or directors who are also shareholders.
🔹 Should not be in lieu of dividends – If the commission or bonus is paid instead of distributing profits as dividends, the deduction is not allowed.
🔹 Actual payment is required – As per Section 43B, the deduction is allowed only when the bonus or commission is actually paid before the due date of filing the income tax return.
🔹 Should be reasonable – The payment should be genuine and reasonable as per the business needs; otherwise, tax authorities may disallow it under Section 40A(2) (excessive or unreasonable payments).
⛔ When Deduction is NOT Allowed?
❌ If the bonus/commission is payable instead of a dividend to shareholders.
❌ If the payment is not actually made by the due date of filing the return.
❌ If the amount is considered excessive by tax authorities under Section 40A(2).
💡 Illustration
Example 1: XYZ Pvt Ltd pays ₹2 lakh as a performance-based commission to its employees. Since the payment is made to employees and is not in lieu of dividends, it is allowed as a deduction under Section 36(1)(ii).
Example 2: ABC Ltd pays ₹10 lakh to its shareholder-directors in the form of commission instead of dividends. Since this is effectively a profit distribution, it is not allowed as a deduction.
📌 Conclusion
✅ Bonus/commission paid to genuine employees is deductible under Section 36(1)(ii).
✅ The payment should not be an alternative to dividends.
✅ Deduction is available only on actual payment before the ITR due date.
✅ Ensure payments are reasonable to avoid disallowance under Section 40A(2).
💡 Proper documentation and adherence to these provisions ensure maximum tax benefits! 🚀
See lessWhat is zero coupon bond?
1️⃣ General Provision for Deduction of Interest As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, specRead more
1️⃣ General Provision for Deduction of Interest
As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, special rules apply.
2️⃣ When is the Deduction Allowed?
✔️ If the capital is borrowed for acquiring a capital asset, the interest expense can be deducted, but the timing of deduction depends on the asset’s usage status:
📌 Before the asset is put to use:
Interest incurred up to the date when the asset is first put to use is not allowed as an immediate deduction.
Instead, it is capitalized and added to the cost of the asset.
This capitalized interest becomes part of the depreciable cost of the asset and is claimed as depreciation over time.
📌 After the asset is put to use:
Interest paid on the borrowed capital after the asset is put to use is allowed as a deduction in the year in which it is incurred.
3️⃣ Special Cases & Exceptions
💡 For House Property (Section 24(b))
Interest on capital borrowed for purchasing, constructing, repairing, or reconstructing a house property is deductible under Section 24(b) as follows:
✅ For self-occupied property: Up to ₹2,00,000 per annum.
✅ For let-out property: Full interest is deductible.
💡 For Capital Gains Computation
If capital is borrowed for acquiring a capital asset (not for business use), the interest paid before the transfer of the asset is added to the cost of acquisition under Section 48 while computing capital gains.
4️⃣ Illustration
🔹 Example 1 (Business Asset): A company borrows ₹50 lakh for purchasing machinery. The machine is installed after one year. The interest for the first year is capitalized, while later interest is deducted from business income.
🔹 Example 2 (House Property): Mr. X takes a home loan of ₹30 lakh at 8% interest. He can claim ₹2 lakh per annum under Section 24(b) if the house is self-occupied.
5️⃣ Conclusion
✅ Interest deduction depends on whether the capital asset is put to use.
✅ Before use – Interest is capitalized; After use – Interest is deductible.
✅ Special provisions apply to house property and capital gains computation.
Understanding these provisions ensures maximum tax benefits while acquiring capital assets using borrowed funds! 🚀
See lessWhat is zero coupon bond?
What is a Zero Coupon Bond? A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity. Key Features of Zero Coupon BondsRead more
What is a Zero Coupon Bond?
A Zero Coupon Bond (ZCB) is a type of debt instrument issued at a discount to its face value but does not pay any periodic interest (coupon). Instead, investors earn a return when they redeem the bond at its full face value upon maturity.
Key Features of Zero Coupon Bonds
✅ Issued at a Discount: Bought at a lower price and redeemed at full value.
✅ No Interest Payments: Unlike regular bonds, there are no periodic interest payments.
✅ Fixed Maturity Value: Investors receive a pre-determined lump sum at maturity.
✅ Government or Corporate Issuance: Can be issued by the government, public sector undertakings (PSUs), or private companies.
Example
If a Zero Coupon Bond has a face value of ₹10,000 and is issued at ₹7,000, the investor earns a return of ₹3,000 (₹10,000 – ₹7,000) upon maturity.
Taxation of Zero Coupon Bonds in India
📌 As Capital Gains (For Investors Holding as an Investment)
The difference between redemption value and purchase price is taxed as capital gains.
Short-Term Capital Gains (STCG) – If sold within 12 months (listed ZCBs) or 36 months (unlisted ZCBs), gains are taxed as per slab rates.
Long-Term Capital Gains (LTCG) – If held beyond the respective period, LTCG tax applies at 10% without indexation under Section 112.
📌 As Business Income (For Traders or Companies)
If ZCBs are held as stock-in-trade, the gain is taxable as business income under Section 28.
📌 Tax Deducted at Source (TDS)
TDS may be applicable under Section 193 when the bond matures if issued by a company or financial institution.
Government-Notified Zero Coupon Bonds
As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax treatment, where the gain is taxed only on maturity and not annually.
Conclusion
Zero Coupon Bonds are an attractive option for long-term investors looking for fixed returns. However, investors should consider capital gains taxation and TDS provisions while investing in these instruments.
See lessWhat is the tax treatment of zero coupon bonds under Income Tax Act?
Tax Treatment of Zero Coupon Bonds under the Income Tax Act 1. What are Zero Coupon Bonds? Zero Coupon Bonds (ZCBs) are debt instruments issued at a discount to their face value but do not pay periodic interest. Instead, the investor earns a return when the bond is redeemed at its maturity value, whRead more
Tax Treatment of Zero Coupon Bonds under the Income Tax Act
1. What are Zero Coupon Bonds?
Zero Coupon Bonds (ZCBs) are debt instruments issued at a discount to their face value but do not pay periodic interest. Instead, the investor earns a return when the bond is redeemed at its maturity value, which is higher than the purchase price.
2. Taxation of Zero Coupon Bonds
✅ For Individual & Non-Business Holders:
The difference between the redemption value and the purchase price is treated as Capital Gains.
Holding Period Classification:
Short-Term Capital Gains (STCG): If held for ≤ 12 months (for listed ZCBs) or ≤ 36 months (for unlisted ZCBs), taxed as per slab rates.
Long-Term Capital Gains (LTCG): If held for > 12 months (for listed ZCBs) or > 36 months (for unlisted ZCBs), taxed at 10% without indexation under Section 112.
✅ For Businesses & Traders (Held as Stock-in-Trade):
Any gain on maturity is treated as business income under Section 28 and taxed at applicable slab rates.
✅ TDS Applicability:
If the ZCB is issued by a company or institution, TDS (Tax Deducted at Source) may apply at the time of maturity under Section 193, unless exempted.
3. Special Tax Treatment for Government-Notified ZCBs
As per Section 2(48) of the Income Tax Act, ZCBs notified by the Central Government enjoy special tax benefits.
The difference between issue and redemption price is not taxed annually but only on maturity as capital gains.
4. Practical Considerations
✔ Keep records of purchase price & redemption value for accurate tax computation.
See less✔ If investing in listed ZCBs, take advantage of the lower holding period for LTCG.
✔ Ensure TDS compliance if applicable.