Sections 36, 37 and 38 of the Income-tax Act, 1961: Business Deductions Explained

Current legal position from 1 April 2026

The Income-tax Act, 2025 is now the operative income-tax statute. It substantially reorganises and simplifies the provisions of the Income-tax Act, 1961. Accordingly, a taxpayer dealing with Tax Year 2026-27 and later should consult the corresponding provisions of the 2025 Act and the Income-tax Rules, 2026. The old section numbers remain important for earlier years, pending proceedings, precedents and historical interpretation.

The 2025 Act places the computation of profits and gains of business or profession in Sections 26 to 60. Section 27 states that income under Section 26 is computed under Sections 28 to 60, except Section 58.

Section 36 of the Income-tax Act, 1961 - Other deductions

Section 36 was a specific deduction provision used while computing income under the head "Profits and gains of business or profession". Unlike the general rule in Section 37, Section 36 dealt with identified categories of expenditure or allowances and attached conditions to each category.

Important deductions historically covered by Section 36

• Insurance premium against damage or destruction of business stocks or stores.
• Specified insurance premiums connected with cattle of members of federal milk co-operative societies.
• Employer-paid employee health insurance premium, subject to the statutory payment and scheme conditions.
• Bonus or commission paid to employees for services rendered, subject to the statutory test.
• Interest on capital borrowed for the purposes of business or profession, subject to restrictions including the pre-use period for capital borrowed to acquire an asset.
• Employer contributions to specified employee welfare and retirement funds and employee contributions subject to the applicable statutory conditions.
• Bad debts actually written off and specified provisions for bad and doubtful debts, subject to the conditions prescribed by the section.
• Specified special reserves, transaction taxes and other deductions expressly listed in the provision.

Interest on borrowed capital

Under the current Section 32(b) of the 2025 Act, interest paid on capital borrowed for business or profession is deductible subject to the statutory conditions. Interest attributable to capital borrowed for acquisition of an asset for the period from borrowing until the asset is first put to use is excluded from this deduction.

Employee contributions to relevant funds

The current law should be checked directly because this area has been recast and amended. Section 29 of the 2025 Act deals with deductions related to employee welfare. The Finance Act, 2026 amended the rule concerning employee contributions for the new Act; therefore, older commentary based only on Section 36(1)(va) of the 1961 Act should not be used for a current-year filing without checking the 2025 Act as amended.

Section 37 of the Income-tax Act, 1961 - General business expenditure

Section 37 functioned as the residual business-expense provision. Broadly, expenditure could qualify where it was not covered by the specific deductions in Sections 30 to 36, was not capital expenditure or personal expenditure, and was laid out or expended wholly and exclusively for the purposes of business or profession.

Expenses that were specifically excluded

The provision denied deduction for expenditure incurred for a purpose that constituted an offence or was prohibited by law. It also excluded expenditure on activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 for the purpose of the general deduction, and separately disallowed expenditure on specified political-party publications.

Meaning of "wholly and exclusively"

The expression focuses on the purpose for which the expenditure is incurred. A claim under the general provision should therefore be supported by the business connection, the nature of the expense, books and vouchers or other evidence, and compliance with any separate restriction or disallowance provision that may apply.

Section 38 of the Income-tax Act, 1961 - Assets partly used for business

Section 38 addressed mixed use. Where premises, a building, machinery, plant or furniture were not used exclusively for business or profession, the relevant deduction was restricted to the business-use proportion determined in accordance with the section.

Premises used partly as a dwelling house

For premises partly used as the assessee's dwelling house, the 1961 Act restricted specified rent, repair and related deductions by reference to the part used for business or profession.

Building, machinery, plant or furniture with mixed use

Where an asset was not exclusively used for business or profession, Section 38(2) restricted specified deductions to a fair proportion having regard to business use.

Quick mapping: old Sections 36, 37 and 38 to the Income-tax Act, 2025

The mapping is functional rather than a statement that every clause has a one-to-one replacement. For a particular deduction, tax year or proceeding, the exact current provision and transitional rule should be checked.

Official Income Tax resources

For the current text and transition material, use the official Income Tax Department resources:

• Income Tax Department - legislation, circulars, notifications and tax information
• Income Tax e-Filing portal

Practical takeaway

For earlier assessment years and legacy proceedings, Sections 36, 37 and 38 of the Income-tax Act, 1961 remain important to understanding the applicable deduction rules. For the current regime from 1 April 2026, the corresponding provisions of the Income-tax Act, 2025 should be cited and applied. Always match the deduction to the relevant tax year, the nature of expenditure and any specific statutory condition before making a claim.