Section 32 Income Tax Act 2025: Which Business Deductions Are Allowed?
Section 32, titled Other deductions, lists specific deductions permitted when computing income under the head "Profits and gains of business or profession" under section 26 of the Income-tax Act, 2025.
What does Section 32 allow?
Section 32 allows eleven categories of deductions, clauses (a) through (k), while computing business or professional income chargeable under section 26. It includes employee bonuses, interest on business borrowings, certain financial-sector reserves, specified expenditure, qualifying losses and securities or commodities transaction taxes.
Section 32 explained clause by clause
Clause (a): Employee bonus or commission
Bonus or commission paid to an employee for services rendered is deductible only if the payment would not otherwise have been payable to that employee as profits or dividend. The provision prevents a distribution of profits being treated as deductible remuneration merely by changing its description.
Clause (b): Interest on borrowed capital
Interest on capital borrowed for business or professional purposes is deductible. However, interest attributable to borrowing for acquiring an asset, from the borrowing date until the asset is first put to use, is excluded from this deduction, whether or not it is capitalised in the accounts. Periodic subscriptions of shareholders or subscribers in qualifying Mutual Benefit Societies are treated as borrowed capital subject to prescribed conditions.
Clause (c): Credit guarantee fund contributions
A public financial institution may deduct contributions paid to the credit guarantee fund trust for small industries specified by Central Government notification.
Clause (d): Zero coupon bond discount
The prescribed pro rata portion of the discount on an eligible zero coupon bond is deductible over the life of the bond. The statutory discount is the difference between the amount received or receivable by the issuer and the amount payable at maturity or redemption.
Clause (e): Special reserve for eligible financial entities
Eligible specified financial entities may deduct amounts transferred to a special reserve maintained for qualifying long-term finance business. The deduction is limited to 20% of eligible business profits computed before this deduction. No deduction is allowed for the portion of cumulative reserve transfers exceeding twice the sum of paid-up share capital and general reserves. Eligibility depends on the entity category and the particular long-term financing activity described in the provision.
Clause (f): Expenditure of notified statutory bodies
Non-capital expenditure of a corporation or body corporate established under Central, State or Provincial legislation may be deducted where it is notified by the Central Government and the expenditure serves the objects authorised by its constituting legislation.
Clause (g): Sugarcane purchased by sugar co-operatives
A co-operative society manufacturing sugar may deduct expenditure on sugarcane purchased at a price equal to or below the price fixed or approved by the Government.
Clause (h): Marked-to-market or expected loss
A marked-to-market loss or other expected loss is deductible when computed in accordance with the Income Computation and Disclosure Standards notified under section 276(2).
Clause (i): Family planning expenditure
A company may deduct bona fide expenditure for promoting family planning among employees. Revenue expenditure is covered directly; capital expenditure is deducted in five equal instalments: one-fifth in the year incurred and the remaining four-fifths over the next four tax years. The statutory cross-references governing depreciation and relevant assets also apply.
Clause (j): Animals that die or become permanently useless
Where an animal used in a business or profession, other than as stock-in-trade, dies or becomes permanently useless, the difference between its actual cost and the amount realised from its carcass or disposal is deductible.
Clause (k): Securities and commodities transaction taxes
Securities transaction tax (STT) or commodities transaction tax (CTT) paid is deductible if the taxable transactions were entered into in the course of business during the tax year and the related income is included in the computation of business or professional income. Payment of STT or CTT on an investment transaction does not by itself establish a deduction under this clause.
Important statutory terms and definitions
Practical illustrations
Frequently asked questions
Is every employee bonus deductible?
No. Section 32(a) excludes a payment that would otherwise have been payable to the employee as profits or dividend. Other applicable tax provisions must also be considered.
Can interest before an asset is first used be deducted?
Not under section 32(b) for the specified pre-use period when capital was borrowed to acquire that asset. The accounting treatment alone does not change this exclusion.
Does every company qualify for the 20% special reserve deduction?
No. Clause (e) applies only to specified entities carrying on qualifying eligible businesses and is subject to the statutory limits.
Is STT deductible against capital gains?
Section 32(k) is a business-income deduction. It requires the relevant transactions to be entered into in the course of business and the related income to be included under business or professional income.
Is section 32 the depreciation provision?
No. Under the Income-tax Act, 2025, section 33 deals with depreciation. Section 32 is titled "Other deductions". Do not confuse this with section 32 of the Income-tax Act, 1961.
Official law and further reading
For authoritative interpretation, consult the consolidated Act and the applicable rules, notifications and subsequent amendments. This article is an explanatory summary, not a substitute for the statutory text.
Last reviewed: 10 November 2026.