The section lists eleven amounts allowed as a deduction in computing income chargeable under section 26. It has no sub-sections; the clauses run from (a) to (k).
Clause (a) allows bonus or commission paid to an employee for services rendered, but only where the amount would not have been payable as profits or dividend had it not been paid as bonus or commission. Clause (b) allows interest on capital borrowed for the business or profession, excluding interest on capital borrowed to acquire an asset for the period from the date of borrowing to the date the asset was first put to use, whether or not capitalised in the books, and deeming recurring subscriptions paid by shareholders or subscribers in Mutual Benefit Societies fulfilling prescribed conditions to be capital borrowed. Clause (c) allows a public financial institution's contribution to the notified credit guarantee fund trust for small industries. Clause (d) allows the pro rata discount on a zero coupon bond, calculated in the prescribed manner, and defines "discount" and "period of life of bond".
Clause (e) allows the amount carried to a special reserve by a specified entity, subject to two conditions: it must not exceed 20% of profits from an eligible business computed under the head before any deduction under the clause, and no deduction is allowable on so much of the aggregate carried to the reserve as exceeds twice the paid-up share capital and general reserves. Sub-clause (A) lists six specified entities — a public financial institution, a financial corporation which is a public sector company, a banking company, a co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank, a housing finance company, and any other financial corporation including a public company — and sub-clauses (B) and (C) match each to its eligible business and define infrastructure facility by reference to the Income-tax Act, 1961.
Clause (f) allows revenue expenditure of a corporation or body corporate constituted by a Central, State or Provincial Act, notified for the clause, incurred for the objects authorised by that Act. Clause (g) allows a sugar co-operative society's expenditure on sugarcane purchased at or below the Government-fixed or approved price. Clause (h) allows marked to market or other expected loss computed as per the income computation and disclosure standards notified under section 276(2).
Clause (i) allows a company's bona fide family planning expenditure for its employees, with capital expenditure spread one-fifth in the year incurred and the balance equally over the four succeeding tax years, and with the scientific research machinery in sections 33(11), 112(3), 38(1)(c), 39(4) (Table: Sl. No. 9), 45(6) and 45(10) applied to the resulting asset. Clause (j) allows the shortfall between the actual cost of animals used otherwise than as stock-in-trade and the amount realised from the carcasses or animals, where they have died or become permanently useless. Clause (k) allows securities transaction tax or commodities transaction tax paid, where the transactions were entered into in the course of the business during the tax year and the income from them is included under the head "Profits and gains of business or profession".
Why it is there
The head allows the standard classes of expenditure elsewhere; this section collects the deductions that need their own guard. Clause (a) stops profit distribution being relabelled as bonus, clause (b)(i) stops pre-use interest being taken as revenue, clause (e) caps a reserve that would otherwise shelter a lender's profits indefinitely, and clause (k) makes a transaction tax deductible only for the trader whose gains are actually taxed as business income.
Who it applies to
A person computing income chargeable under section 26
An employer paying bonus or commission to an employee
A borrower paying interest on capital borrowed for business or profession
A corporation or body corporate constituted by a Central, State or Provincial Act and notified for clause (f)
A co-operative society engaged in the manufacture of sugar
A company incurring family planning expenditure for its employees
A trader paying securities transaction tax or commodities transaction tax on business transactions
The figures, and what each one turns on
Read the condition in the same row. A figure quoted without it is a wrong answer with a citation attached.
What
Figure
The condition on it
Where
Ceiling on the amount carried to the special reserve in a year
20% of the profits derived from an eligible business
Profits computed under the head before any deduction under clause (e)
Clause (e)(i)
Aggregate ceiling on the special reserve
Twice the amount of paid-up share capital and of general reserves
Once the aggregate carried to the reserve exceeds this, no deduction is allowable on the excess
Clause (e)(ii)
Spread of capital expenditure on promoting family planning
One-fifth in the year incurred, the balance in equal instalments over the four immediately succeeding tax years
Where the family planning expenditure, or part of it, is of a capital nature and is incurred by a company
Clause (i)(A)
Period for which borrowing-cost interest is not allowed
From the date the capital was borrowed to the date the asset was first put to use
Capital borrowed for acquisition of an asset; applies whether or not the interest is capitalised in the books of account
Clause (b)(i)
What this means in practice
Clause (b)(i) is the trap in ordinary accounts: interest on money borrowed to buy an asset is not deductible for the pre-use period, and the words "whether capitalised in the books of account or not" mean the accounting treatment cannot rescue it. Clause (e) has two independent limits and both must be watched — a yearly 20% cap and an aggregate cap at twice paid-up share capital plus general reserves. Clause (i) applies only to a company, and it borrows the scientific-research machinery for the resulting asset. Clause (k) is conditional on the income from those very transactions being computed under the business head, so a trader whose gains are assessed as capital gains gets no deduction for the transaction tax.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
A housing finance company earns Rs. 50 crore from its eligible business of long-term finance for house purchase, computed before any deduction under clause (e). It may carry up to Rs. 10 crore to the special reserve for the year. If its paid-up share capital and general reserves total Rs. 200 crore, the aggregate reserve is deductible only up to Rs. 400 crore; anything beyond gets no deduction, however far the yearly 20% figure would stretch.
Where you meet this section
These are the lines that appear as additions or disallowances in the computation attached to a business return and in the tax audit report. The clauses most often argued in scrutiny are (b)(i) on pre-use interest and (e) on the special reserve cap.
The words themselves
such interest shall not include interest on capital borrowed for acquisition of an asset, whether capitalised in the books of account or not, for any period beginning from the date the capital was borrowed for acquisition of the asset till the date that asset was first put to use
Section 32(b)(i), Income-tax Act, 2025.
when the aggregate of such amounts carried to such reserve account from time to time exceeds twice the amount of paid-up share capital and of general reserves of the specified entity, no deduction shall be allowable on such excess
Section 32(e)(ii), Income-tax Act, 2025.
What people get wrong
Claiming interest on an acquisition loan from the date of borrowing. Clause (b)(i) disallows it up to the date the asset was first put to use, capitalised or not.
Applying only the 20% test to the special reserve. Clause (e)(ii) imposes a cumulative ceiling at twice paid-up share capital plus general reserves.
Deducting the whole family planning capital expenditure in the year incurred. Clause (i)(A) spreads it over five years, and clause (i) is available only to a company.
Deducting securities transaction tax where the gains are returned as capital gains. Clause (k)(ii) requires the income to be under the business head.
Treating any bonus to an employee as deductible. Clause (a) denies it where the amount would have been payable as profits or dividend.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
Rules of the Income-tax Rules, 2026 that work section 32. Where the rule’s own heading names the section we say so; the rest are marked on reading the rule, which is our derivation and not the department’s. A rule that serves the section silently and that we have missed will not appear here.
Rule 7 — Procedure for notification of zero coupon bond — on reading the rule
Rule 23 — Computation of pro rata amount of discount on a zero coupon bond for purpose of section 32(d)
Rule 24 — Notification of infrastructure facility for the purposes of section 32(e)
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
Circular No. 14/2023 — Standard operating procedure SOP for making application for recomputation of total income of a co operative society engaged in the 2023-07-27
Circular No. 18/2021 — Clarification regarding section 36 1 xvii of the income tax act 1961 inserted vide finance act 2015 2021-10-25
Circular No. 3/2008 — Explanatory Notes to the Provisions of the Finance Act, 2007 2008-03-12
Circular No. 601 — 865. Prima facie adjustments under section 143(1)(a) in respect of disallowance under section 43B and nature of evidence to be enc 1991-06-04
Circular No. 414 — 308. Bonus - Whether deduction under clause (ii), first proviso, is admissible if it is within the minimum 8.33 per cent of salary 1985-03-14
Circular No. 403 — 315. Contribution to approved superannuation fund - Whether pension benefits can be provided to employees under rule 89 of Income- 1984-12-05
Circular No. 287 — 307. Bonus - Whether it would be permissible for employers to claim deduction of bonus paid in excess of amount worked out as per 1980-12-04
Circular No. 162 — 1290. Denial of income-tax clearance certificate to contractors on levy of penalty for concealment and/or conviction - Guidelines 1975-03-24
Circular No. 146 — Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its inse 1974-09-26
Circular No. 14 — 316. Contribution to approved gratuity fund - Points connected with tax relief in respect of initial contribution under clause (v) 1969-04-23
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Notification No. 9 — A notification under section 36 of the Income-tax Act, 1961 1993-11-23
Notification No. 726E — For the purposes of the said clause in respect of the assessment year commencing on and from the 1st day of April approved under s 1984-09-19
Notification No. 3433 — Following conditions for the deduction of contributions specified under section 36 1965-10-21
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 32. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
Badridas Daga v CITSupreme CourtHelps taxpayertagged s.36(1)(vii) My employee embezzled money from the business bank account. Can I write that off for tax?
CIT v Alom Extrusions LtdSupreme CourtHelps taxpayertagged s.36(1)(va) Explanation I paid the pf contribution after year end but before the return due date. Is the deduction gone?
CIT v Mahindra and Mahindra LtdSupreme CourtHelps taxpayertagged s.36(1)(iii) The lender wrote off the principal of a loan I used to buy machinery. Is that taxable?
CIT v Textool Co LtdSupreme CourtHelps taxpayertagged s.36(1)(v) We paid our gratuity money straight to lic while the fund's approval was still pending. Will s.36(1)(v) be denied?
Checkmate Services P Ltd v CITSupreme CourtHelps departmenttagged s.36(1)(va) You deposited employees' pf late but before filing the return. Is the deduction saved?
Hero Cycles (P) Ltd v CITSupreme CourtHelps taxpayertagged s.36(1)(iii) The AO says my borrowings funded advances to a sister concern and my directors. Can he disallow the interest?
Munjal Sales Corporation v CITSupreme CourtHelps taxpayertagged s.36(1)(iii) My firm pays interest on partners' capital. Is the s.40(b)(iv) ceiling the only test the AO can apply?
S.A. Builders Ltd v CIT (Appeals)Supreme CourtCuts both waystagged s.36(1)(iii) I passed borrowed money to my sister concern interest-free. Can the AO disallow the interest I paid?
TRF Ltd v CITSupreme CourtCuts both waystagged s.36(1)(vii) The AO wants proof my debt is actually irrecoverable before allowing the bad debt write-off. Is that right?
CIT v Reliance Utilities and Power LtdHigh CourtHelps taxpayertagged s.36(1)(iii) I have my own funds and borrowings. Can the AO assume the interest-free advance came out of the loan?
ChrysCapital Investment Advisors v DCITHigh CourtCuts both waystagged s.36(1)(ii) The TPO kept a comparable with an abnormal profit margin. Can I get it excluded just for that?
PCIT v KRBL Infrastructure LtdHigh CourtHelps taxpayertagged s.36(1)(iii) The officer accepts my lender exists but says the lender's own purchases were bogus. Do I have to explain where the lender got the money?
Raj Kumar Bothra v DCITHigh CourtHelps taxpayertagged s.36(1)(va) CPC disallowed my late-deposited pf and esi under 143(1)(a). Was a summary adjustment even open to them?
Orient Craft Ltd v DCITITATHelps departmenttagged s.36(1)(va) I withdrew my appeal against the section 143(1) intimation because the case went into scrutiny. Can the Assessing Officer now rectify under section…
Samsung C and T Corporation India P Ltd v DCITITATHelps taxpayertagged s.36(1)(va) CPC issued the section 143(1)(a) notice and passed the intimation a week later, and the portal shows a response I never filed. Is that intimation…
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.
