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.
Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer. 1Read more
Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer.
1. Key Provisions of Section 43B
As per Section 43B, the following expenses are allowed as a deduction only in the year of actual payment:
🔹 Taxes & Duties: Any tax, duty, cess, or fee payable under any law (e.g., GST, excise duty, customs duty, etc.). 🔹 Employer’s Contribution to Provident Fund (PF) & Other Welfare Funds: Employer’s contribution to PF, ESI, superannuation fund, gratuity fund, etc. is deductible only if paid before the due date under the respective law. 🔹 Bonus & Commission to Employees: Deductible only when paid. 🔹 Interest on Loans from Banks & Financial Institutions: Interest on borrowed capital from banks, public financial institutions, or NBFCs is allowed only if actually paid. 🔹 Leave Encashment: Deduction for leave encashment is allowed only if the amount is paid. 🔹 Payments to Railways: Any sum payable to the Indian Railways for freight charges is deductible only when paid.
2. Exception: Payment Before the Due Date of Filing ITR
An exception exists under the first proviso to Section 43B, which states that if the payment is made before the due date of filing the income tax return (ITR) under Section 139(1), the expense is still allowed in the same financial year. This is particularly relevant for loan interest, tax payments, and statutory contributions.
3. Disallowance & Impact on Businesses
If an assessee claims a deduction without making the actual payment, the tax authorities will disallow the expense, increasing the taxable income.
Non-payment of employer’s PF or ESI within the due date under the respective Act (not ITR due date) results in permanent disallowance, as per recent judicial rulings.
4. Key Amendments & Judicial Rulings
Amendment in Finance Act 2023: Clarified that employer’s contribution to PF/ESI is deductible only if deposited within the due date of the respective law, not the ITR due date.
SC Ruling in Checkmate Services (P) Ltd. case reaffirmed this principle, ensuring strict compliance with PF/ESI payment deadlines.
5. Practical Considerations
✅ Maintain proper records of payments to claim deductions. ✅ Ensure that statutory dues like GST, PF, and ESI are deposited on time to avoid disallowance. ✅ If payments are delayed, pay before filing ITR to claim deductions in the same year.
Conclusion
Section 43B is a crucial provision ensuring timely payments of statutory and financial liabilities. Businesses must align their accounting and payment cycles to avoid disallowances and ensure maximum tax benefits.
Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible. 1. Deduction for Bad Debts [Section 3Read more
Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible.
1. Deduction for Bad Debts [Section 36(1)(vii)]
A bad debt is a debt that has become irrecoverable and is written off from the books of accounts. The following conditions must be satisfied for claiming a deduction: ✅ The debt must have been included as income in earlier years. ✅ The debt must be related to the business or profession carried on by the taxpayer. ✅ The debt should be actually written off in the books of accounts in the year in which the deduction is claimed.
🔹 Important: Writing off the debt in the books of accounts is mandatory—mere provision for bad debts will not be allowed as a deduction.
2. Deduction for Provision for Doubtful Debts [Section 36(1)(viia)]
Normally, a provision for doubtful debts (i.e., expected bad debts that may occur in the future) is not deductible. However, an exception exists for banks, financial institutions, and NBFCs:
Scheduled Banks & Cooperative Banks: Deduction up to 8.5% of total income (before deductions) and 10% of rural advances.
NBFCs: Deduction up to 5% of total income on provisions for doubtful debts.
3. When Bad Debt Recovery is Taxable [Section 41(4)]
If a bad debt, which was earlier allowed as a deduction, is subsequently recovered, it must be offered as income in the year of recovery.
The Supreme Court (T.R.F. Ltd. case) has ruled that if a bad debt is written off in the books, the deduction cannot be denied merely because the assessee failed to prove irrecoverability.
Businesses should document communication with the debtor (reminders, legal notices) to substantiate the claim in case of scrutiny.
Conclusion
Bad debts actually written off in the books are allowed as a deduction.
Provision for doubtful debts is generally not allowed, except for certain financial institutions.
Recovered bad debts must be offered as income in the year of recovery.
For businesses, maintaining proper records and ensuring compliance with Section 36(1)(vii) & (viia) is crucial for claiming these deductions.
Marked-to-market (MTM) losses arise when businesses or traders adjust the value of their assets, liabilities, or financial instruments to reflect fair market value at the end of the financial year. The Income Tax Act, 1961 has specific provisions regarding the deductibility of such losses. 1. ApplicRead more
Marked-to-market (MTM) losses arise when businesses or traders adjust the value of their assets, liabilities, or financial instruments to reflect fair market value at the end of the financial year. The Income Tax Act, 1961 has specific provisions regarding the deductibility of such losses.
1. Applicability of MTM Loss Deduction
MTM losses are generally allowed as a deduction only if they satisfy the following conditions:
The loss is realized or recognized as per accounting standards.
It is a revenue loss and not a capital loss.
The loss is computed following the Income Computation and Disclosure Standards (ICDS) prescribed under the Act.
2. Disallowance Under Section 40A(3) and Section 37(1)
If the MTM loss is notional (i.e., an unrealized loss), it may be disallowed under Section 37(1), as it is not an expense incurred for business.
Losses resulting from non-business transactions or capital assets (such as revaluation of land or investments) are not allowed.
3. ICDS and MTM Loss Deduction
ICDS – I mandates that expected losses should be recognized only if permitted under the Act.
ICDS – VI (Foreign Exchange Gains/Losses) allows MTM losses on monetary items but not on capital account transactions.
ICDS – VIII (Securities) permits deduction of MTM losses only for securities held as stock-in-trade.
4. Loss on Derivative Contracts
Section 43(5) considers derivative trading in recognized stock exchanges as a non-speculative business, allowing deduction for MTM losses.
However, speculative MTM losses in unregulated derivatives may not be deductible.
5. Judicial Precedents
Several courts have allowed MTM losses if they are business expenses, such as for banks, financial institutions, or traders. However, notional losses due to mere valuation adjustments are typically not allowed as deductions.
Conclusion
The deductibility of MTM losses depends on their nature, compliance with ICDS, and whether they are realized or unrealized. To claim deductions, businesses should ensure proper accounting treatment and classify the losses as business expenses rather than capital losses.
Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance: 1. Advertisement for Political Purposes Expenses incurredRead more
Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance:
1. Advertisement for Political Purposes
Expenses incurred on advertisements directly supporting political parties or political causes are not allowed as deductions. However, contributions to political parties through Electoral Bonds or donations under Section 80GGC may be eligible for tax benefits.
2. Advertisements Resulting in Capital Expenditure
If the advertisement expense creates a long-term brand value, such as launch campaigns, logo redesigns, or promotional hoardings with permanent benefits, it may be classified as a capital expense and not deductible as a business expense. However, depreciation under Section 32 may be available if treated as an intangible asset.
3. Expenses That Are Prohibited by Law
Any expenditure incurred for an illegal purpose, violating regulations, or encouraging unlawful activities is not deductible. This includes advertisements promoting banned products, misleading claims, or violations of ethical advertising standards.
4. Personal Advertisement Expenses
If the expense is related to personal promotion rather than business (e.g., congratulatory advertisements for individuals, non-business sponsorships), it is not deductible. Only business-related advertising expenses qualify.
5. Non-Compliance with TDS Requirements
If an advertisement payment exceeds the prescribed limit and TDS is not deducted as per Section 194C, the expense can be disallowed under Section 40(a)(ia). Ensuring proper TDS compliance is essential to avoid disallowance.
6. Excessive or Unreasonable Advertisement Expenses
If the expense is disproportionate to the business scale or unreasonably high, the Assessing Officer may invoke Section 40A(2) to disallow the excessive portion.
Conclusion To ensure the deductibility of advertisement expenses, businesses should maintain proper records, ensure compliance with tax laws, and justify the necessity of expenses for business purposes. Keeping track of TDS deductions, ensuring expenses are revenue in nature, and aligning with business requirements can help prevent tax disallowances.
For companies operating in multiple locations, the CSR expenditure should ideally be directed toward areas where the company has the most significant operational presence. Here are some key points to help decide: Core Area of Operations:Companies are encouraged to spend at least 15% of their CSR funRead more
For companies operating in multiple locations, the CSR expenditure should ideally be directed toward areas where the company has the most significant operational presence. Here are some key points to help decide:
Core Area of Operations: Companies are encouraged to spend at least 15% of their CSR funds in the area where they have their primary business activities. This is usually determined by factors such as:
The location of the main office or headquarters.
The concentration of the workforce.
The area where the company’s core production, services, or business activities take place.
Flexibility to Spread Impact: While a significant portion of CSR spending should target the core area, companies are not restricted to only one location. They can also allocate funds to other areas where they operate if it creates additional social benefits. However, it’s important to ensure that the chosen area reflects the company’s primary business interests and community impact.
Objective of CSR Spending: The main goal is to generate a positive impact on the local community that is most closely associated with the company’s operations. Thus, the decision should be based on where your company can make the most meaningful contribution.
Documentation and Reporting: Whatever allocation you choose, maintain clear records. This will help in CSR reporting and ensure compliance with the guidelines under the Companies Act and the associated CSR Regulations.
What 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.
What is the provision of section 43B under Income Tax Act?
Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer. 1Read more
Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer.
1. Key Provisions of Section 43B
As per Section 43B, the following expenses are allowed as a deduction only in the year of actual payment:
🔹 Taxes & Duties: Any tax, duty, cess, or fee payable under any law (e.g., GST, excise duty, customs duty, etc.).
🔹 Employer’s Contribution to Provident Fund (PF) & Other Welfare Funds: Employer’s contribution to PF, ESI, superannuation fund, gratuity fund, etc. is deductible only if paid before the due date under the respective law.
🔹 Bonus & Commission to Employees: Deductible only when paid.
🔹 Interest on Loans from Banks & Financial Institutions: Interest on borrowed capital from banks, public financial institutions, or NBFCs is allowed only if actually paid.
🔹 Leave Encashment: Deduction for leave encashment is allowed only if the amount is paid.
🔹 Payments to Railways: Any sum payable to the Indian Railways for freight charges is deductible only when paid.
2. Exception: Payment Before the Due Date of Filing ITR
An exception exists under the first proviso to Section 43B, which states that if the payment is made before the due date of filing the income tax return (ITR) under Section 139(1), the expense is still allowed in the same financial year. This is particularly relevant for loan interest, tax payments, and statutory contributions.
3. Disallowance & Impact on Businesses
If an assessee claims a deduction without making the actual payment, the tax authorities will disallow the expense, increasing the taxable income.
Non-payment of employer’s PF or ESI within the due date under the respective Act (not ITR due date) results in permanent disallowance, as per recent judicial rulings.
4. Key Amendments & Judicial Rulings
Amendment in Finance Act 2023: Clarified that employer’s contribution to PF/ESI is deductible only if deposited within the due date of the respective law, not the ITR due date.
SC Ruling in Checkmate Services (P) Ltd. case reaffirmed this principle, ensuring strict compliance with PF/ESI payment deadlines.
5. Practical Considerations
✅ Maintain proper records of payments to claim deductions.
✅ Ensure that statutory dues like GST, PF, and ESI are deposited on time to avoid disallowance.
✅ If payments are delayed, pay before filing ITR to claim deductions in the same year.
Conclusion
Section 43B is a crucial provision ensuring timely payments of statutory and financial liabilities. Businesses must align their accounting and payment cycles to avoid disallowances and ensure maximum tax benefits.
See lessCan we get income tax deduction of Bed debts and provision for doubtful debts?
Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible. 1. Deduction for Bad Debts [Section 3Read more
Under the Income Tax Act, 1961, bad debts and provisions for doubtful debts are treated differently for deduction purposes. The law allows actual bad debts as a deduction under certain conditions, while provisions for doubtful debts are generally not deductible.
1. Deduction for Bad Debts [Section 36(1)(vii)]
A bad debt is a debt that has become irrecoverable and is written off from the books of accounts. The following conditions must be satisfied for claiming a deduction:
✅ The debt must have been included as income in earlier years.
✅ The debt must be related to the business or profession carried on by the taxpayer.
✅ The debt should be actually written off in the books of accounts in the year in which the deduction is claimed.
🔹 Important: Writing off the debt in the books of accounts is mandatory—mere provision for bad debts will not be allowed as a deduction.
2. Deduction for Provision for Doubtful Debts [Section 36(1)(viia)]
Normally, a provision for doubtful debts (i.e., expected bad debts that may occur in the future) is not deductible. However, an exception exists for banks, financial institutions, and NBFCs:
Scheduled Banks & Cooperative Banks: Deduction up to 8.5% of total income (before deductions) and 10% of rural advances.
NBFCs: Deduction up to 5% of total income on provisions for doubtful debts.
3. When Bad Debt Recovery is Taxable [Section 41(4)]
If a bad debt, which was earlier allowed as a deduction, is subsequently recovered, it must be offered as income in the year of recovery.
4. Key Judicial Decisions & Practical Considerations
The Supreme Court (T.R.F. Ltd. case) has ruled that if a bad debt is written off in the books, the deduction cannot be denied merely because the assessee failed to prove irrecoverability.
Businesses should document communication with the debtor (reminders, legal notices) to substantiate the claim in case of scrutiny.
Conclusion
Bad debts actually written off in the books are allowed as a deduction.
Provision for doubtful debts is generally not allowed, except for certain financial institutions.
Recovered bad debts must be offered as income in the year of recovery.
For businesses, maintaining proper records and ensuring compliance with Section 36(1)(vii) & (viia) is crucial for claiming these deductions.
See lessIs income tax deduction of marked to market loss is allowed?
Marked-to-market (MTM) losses arise when businesses or traders adjust the value of their assets, liabilities, or financial instruments to reflect fair market value at the end of the financial year. The Income Tax Act, 1961 has specific provisions regarding the deductibility of such losses. 1. ApplicRead more
Marked-to-market (MTM) losses arise when businesses or traders adjust the value of their assets, liabilities, or financial instruments to reflect fair market value at the end of the financial year. The Income Tax Act, 1961 has specific provisions regarding the deductibility of such losses.
1. Applicability of MTM Loss Deduction
MTM losses are generally allowed as a deduction only if they satisfy the following conditions:
The loss is realized or recognized as per accounting standards.
It is a revenue loss and not a capital loss.
The loss is computed following the Income Computation and Disclosure Standards (ICDS) prescribed under the Act.
2. Disallowance Under Section 40A(3) and Section 37(1)
If the MTM loss is notional (i.e., an unrealized loss), it may be disallowed under Section 37(1), as it is not an expense incurred for business.
Losses resulting from non-business transactions or capital assets (such as revaluation of land or investments) are not allowed.
3. ICDS and MTM Loss Deduction
ICDS – I mandates that expected losses should be recognized only if permitted under the Act.
ICDS – VI (Foreign Exchange Gains/Losses) allows MTM losses on monetary items but not on capital account transactions.
ICDS – VIII (Securities) permits deduction of MTM losses only for securities held as stock-in-trade.
4. Loss on Derivative Contracts
Section 43(5) considers derivative trading in recognized stock exchanges as a non-speculative business, allowing deduction for MTM losses.
However, speculative MTM losses in unregulated derivatives may not be deductible.
5. Judicial Precedents
Several courts have allowed MTM losses if they are business expenses, such as for banks, financial institutions, or traders. However, notional losses due to mere valuation adjustments are typically not allowed as deductions.
Conclusion
The deductibility of MTM losses depends on their nature, compliance with ICDS, and whether they are realized or unrealized. To claim deductions, businesses should ensure proper accounting treatment and classify the losses as business expenses rather than capital losses.
See lessWhen the deduction of advertisement is not not allowed under income tax act?
Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance: 1. Advertisement for Political Purposes Expenses incurredRead more
Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance:
1. Advertisement for Political Purposes
Expenses incurred on advertisements directly supporting political parties or political causes are not allowed as deductions. However, contributions to political parties through Electoral Bonds or donations under Section 80GGC may be eligible for tax benefits.
2. Advertisements Resulting in Capital Expenditure
If the advertisement expense creates a long-term brand value, such as launch campaigns, logo redesigns, or promotional hoardings with permanent benefits, it may be classified as a capital expense and not deductible as a business expense. However, depreciation under Section 32 may be available if treated as an intangible asset.
3. Expenses That Are Prohibited by Law
Any expenditure incurred for an illegal purpose, violating regulations, or encouraging unlawful activities is not deductible. This includes advertisements promoting banned products, misleading claims, or violations of ethical advertising standards.
4. Personal Advertisement Expenses
If the expense is related to personal promotion rather than business (e.g., congratulatory advertisements for individuals, non-business sponsorships), it is not deductible. Only business-related advertising expenses qualify.
5. Non-Compliance with TDS Requirements
If an advertisement payment exceeds the prescribed limit and TDS is not deducted as per Section 194C, the expense can be disallowed under Section 40(a)(ia). Ensuring proper TDS compliance is essential to avoid disallowance.
6. Excessive or Unreasonable Advertisement Expenses
If the expense is disproportionate to the business scale or unreasonably high, the Assessing Officer may invoke Section 40A(2) to disallow the excessive portion.
Conclusion
See lessTo ensure the deductibility of advertisement expenses, businesses should maintain proper records, ensure compliance with tax laws, and justify the necessity of expenses for business purposes. Keeping track of TDS deductions, ensuring expenses are revenue in nature, and aligning with business requirements can help prevent tax disallowances.
In case of companies having multi-locational operations, which local area of operations should the company choose for spending the amount earmarked for CSR operations?
For companies operating in multiple locations, the CSR expenditure should ideally be directed toward areas where the company has the most significant operational presence. Here are some key points to help decide: Core Area of Operations:Companies are encouraged to spend at least 15% of their CSR funRead more
For companies operating in multiple locations, the CSR expenditure should ideally be directed toward areas where the company has the most significant operational presence. Here are some key points to help decide:
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- The location of the main office or headquarters.
- The concentration of the workforce.
- The area where the company’s core production, services, or business activities take place.
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See lessCore Area of Operations:
Companies are encouraged to spend at least 15% of their CSR funds in the area where they have their primary business activities. This is usually determined by factors such as:
Flexibility to Spread Impact:
While a significant portion of CSR spending should target the core area, companies are not restricted to only one location. They can also allocate funds to other areas where they operate if it creates additional social benefits. However, it’s important to ensure that the chosen area reflects the company’s primary business interests and community impact.
Objective of CSR Spending:
The main goal is to generate a positive impact on the local community that is most closely associated with the company’s operations. Thus, the decision should be based on where your company can make the most meaningful contribution.
Documentation and Reporting:
Whatever allocation you choose, maintain clear records. This will help in CSR reporting and ensure compliance with the guidelines under the Companies Act and the associated CSR Regulations.