Taxation · Profits and Gains of Business or Profession

Admissible Deductions and Allowable Expenses in Business Income

Updated 5 October 2026 · Fact-checked

Admissible deductions are business expenses the Income-tax Act, 2025 lets you subtract from business receipts to reach taxable profit. An expense is allowed if it is revenue in nature, incurred wholly and exclusively for business, relates to the tax year, and is not barred by a disallowance. Check the specific deduction first, then the general test.

Understand Admissible Deductions and Allowable Expenses

Business income is not the same as accounting profit. You start with the profit in the books and then adjust it. You add back items the Act does not allow and you give extra deductions the Act specifically permits. This topic covers the deductions side.

Every deduction has to pass tests. The expense must be related to the business or profession of the assessee. It must be incurred in the relevant tax year (or be allowed by a specific rule). It must be revenue in nature, not capital. It must be wholly and exclusively for business, not personal. It must not be a loss or expense the Act specifically bars or caps.

The Act gives specific deductions for common items: rent, rates and taxes for premises used in the business, repairs to premises and to plant, machinery and furniture, insurance premium on stock, plant and building, and interest on borrowed capital used for business. It also allows bad debts (on conditions), employer contributions to approved funds, and certain other items. There is also a general deduction for any other business expenditure that is not capital, not personal, and not barred.

The capital versus revenue question causes the most trouble. Expenditure that creates an asset or an enduring benefit is usually capital. Expenditure that keeps the business running day to day is usually revenue. These are guides, not rigid rules, so apply them to the facts given in the question.

Treat deductions and disallowances as two halves of one exercise. A deduction might be allowed in principle but disallowed because of a condition, for example non-deduction of TDS or a cash payment limit. Study this page together with inadmissible expenses.

Key rules to remember

Business income (basic layout): Business income = Net profit as per books + Inadmissible items debited − Admissible items not debited − Income exempt or taxed elsewhere credited + Business income not credited; Start from book profit and adjust line by line. Show each adjustment separately for step marks.
General tests of allowability: Revenue in nature + Wholly and exclusively for business + Relates to the tax year + Not personal + Not specifically disallowed; If any one test fails, the expense is not allowed under the general provision.
Rent, rates, taxes, repairs and insurance: Allowed = Actual amount paid or payable for premises, plant, machinery, furniture or stock used for business; Repairs must be current repairs. Improvements or renewals that create a new asset are capital and not allowed here.
Interest on borrowed capital: Allowed = Interest on capital borrowed for business; The proviso applies to capital borrowed to acquire a new asset for extension of an existing business or profession. Interest for the period up to the date the asset is first put to use is not deductible. It is capitalised, that is, added to the cost of the asset. Interest for the period after that date is allowed. For a new business, interest on borrowed capital for the period before the business is set up or commenced is not deductible as business expenditure. If it relates to an asset acquired, it is capitalised to that asset's cost.
Bad debts: Allowed if (1) the debt relates to your business, (2) it was taken into income in this or an earlier year, and (3) it is written off as irrecoverable in the books; A mere provision for doubtful debts is not allowed. A loan or advance that was never taken into income earlier is not allowable as a bad debt, unless lending is itself your business. Recovery of a bad debt earlier allowed becomes business income.
Capital vs revenue (guide): Enduring benefit or new asset → capital. Running expense or stock-in-trade cost → revenue; Treat as a guide only. Decide on the facts of each case.

How to solve Admissible Deductions and Allowable Expenses questions

Use this method for any question that asks whether an expense is allowed or asks you to compute business income.

1Read the question and list every expense and receipt separately. Note which are already debited in the profit and loss account.
2For each expense, ask: is it capital or revenue? Capital items are not deductible under this topic (check depreciation separately).
3Match the expense to a specific deduction such as rent, repairs, insurance, interest or bad debts. Check the conditions of that deduction.
4If no specific deduction fits, apply the general test: wholly and exclusively for business, not personal, not barred.
5Check whether any disallowance rule applies, such as TDS default or cash payment limit. If so, add it back.
6Adjust the book profit: add back inadmissible items, subtract admissible items not yet debited, and remove non-business income.
7Show the final business income with a clear working note for each adjustment, and state a one-line reason for every allow or disallow decision.

Quickest way: Three-pass tick method for MCQs and written answers

When to use it: Use it when time is short, especially in MCQs and in long computation questions with many items.

Pass 1: Mark each item as C (capital), P (personal) or R (revenue). Only R items can be considered for deduction.
Pass 2: For each R item, tick if it matches a named deduction or passes the general test. Cross it if a disallowance applies.
Pass 3: Write the adjustment table in two columns: add back and deduct. Total both columns and apply to book profit.
In MCQs, eliminate options that allow capital items, personal items or a mere provision for bad debts.
In written answers, give a short reason beside each item. Even if a final figure is wrong, you earn marks for correct treatment.

Common mistakes in Admissible Deductions and Allowable Expenses

Allowing provision for doubtful debts as a bad debt deduction.
Students see 'bad debts' in the profit and loss account and assume it is all deductible.
Fix: Allow only debts actually written off as irrecoverable in the books. Add back any general or specific provision.
Treating all repairs as revenue expenditure.
The word 'repairs' looks like a running expense.
Fix: Check if the work is current repair or an improvement or new asset. Improvements are capital. Only current repairs are allowed.
Allowing interest, for the period before the asset is first put to use, on a loan taken to acquire a new asset for extension of an existing business.
Students focus on 'interest on borrowed capital' and ignore the timing.
Fix: For a new asset acquired for extension of an existing business, interest up to the date the asset is first put to use is added to the cost of the asset. Interest after that date is allowed as a deduction.
Forgetting to treat recovery of a bad debt already allowed as income.
Students look at deductions only and miss the reverse effect.
Fix: If a debt allowed earlier is later recovered, include the recovery as business income in the year of recovery.
Allowing personal expenses charged to the business.
The books show the item under general expenses, so it looks business-related.
Fix: Apply the wholly and exclusively test. Add back the personal portion such as proprietor's household or private use.
Ignoring disallowance rules after deciding an item is allowable.
Students stop at the allowability test and forget conditions like TDS or payment limits.
Fix: Always run a second check against inadmissible expense rules before finalising the adjustment.

Worked examples

Example 1

Mr. Rao runs a trading business. His net profit as per profit and loss account is ₹5,00,000 after debiting: (a) provision for doubtful debts ₹40,000; (b) bad debts actually written off ₹25,000, which were included in income of earlier years; (c) expenditure on shop building ₹30,000, of which ₹10,000 is for adding a new mezzanine floor (capital); (d) insurance premium on stock ₹12,000; (e) personal expenses of Mr. Rao ₹20,000. Compute business income. Depreciation on the new floor is considered separately and is ignored here.

Show the solution

Start with net profit as per books: ₹5,00,000.
Provision for doubtful debts ₹40,000 is not a bad debt written off. Add back ₹40,000.
Bad debts written off ₹25,000 relate to the business, were taken into income earlier and are written off in books. Allowed. No adjustment.
Building expenditure: ₹20,000 is current repair and is allowed. ₹10,000 is for adding a new floor, which is capital, so it is not a repair. Add back ₹10,000. The floor is capitalised, and depreciation on it is considered separately.
Insurance premium on stock ₹12,000 is allowed. No adjustment.
Personal expenses ₹20,000 fail the wholly and exclusively test. Add back ₹20,000.
Total add-backs = 40,000 + 10,000 + 20,000 = ₹70,000.
Business income = 5,00,000 + 70,000 = ₹5,70,000.

Answer: Business income = ₹5,70,000

Example 2

A manufacturer, already running its manufacturing business, follows the mercantile system. Its books show net profit of ₹8,00,000 after debiting interest of ₹90,000. Of this, ₹60,000 is interest on a loan taken to buy machinery, which was bought and put to use on the day the loan was taken. The other ₹30,000 is interest on a separate loan used to buy a factory building, an extension of the existing manufacturing business, that was not yet ready for use at year end. The books also show rent of ₹1,20,000 for the year on the factory premises, which is a revenue expense already debited. Compute business income, ignoring depreciation.

Show the solution

Start with net profit as per books: ₹8,00,000.
Interest of ₹60,000 on the machinery loan relates to an asset put to use on the day the loan was taken, so there is no pre-use period. It is allowed. No adjustment.
The factory building is an extension of the existing manufacturing business. Interest of ₹30,000 on its loan relates to the period before the building is first put to use. It is not deductible and is capitalised, that is, added to the cost of the building. Add back ₹30,000.
Rent of ₹1,20,000 on the factory premises is a revenue expense for premises used in the business and is already debited. It is allowed. It is a distractor, so no adjustment is needed.
Business income = 8,00,000 + 30,000 = ₹8,30,000.

Answer: Business income = ₹8,30,000

Exam tips

Write the reason for each allow or disallow decision in a few words. Step marks depend on correct treatment, not only the final figure.
In MCQs, watch for the word 'provision'. Provisions for bad debts are usually not allowed, but actual write-offs usually are.
Check the timing of interest on borrowed capital. If the loan is for a new asset for extension of an existing business, interest before the asset is first put to use is capitalised and not deductible, and interest after use is allowed.
Use a two-column add-back and deduct table in long problems. It keeps your working clean and easy for the examiner to follow.
Read facts carefully for items that look allowable but are personal or capital. The question often hides one such item.

Practice questions from Profits and Gains of Business or Profession

Admissible Deductions and Allowable Expenses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ExecutiveAllowable Deductions in Computing Business Income

Admissible Deductions and Allowable Expenses: frequently asked questions

How do I decide if an expense is capital or revenue?

Ask whether it creates a new asset or an enduring benefit. If yes, it is usually capital. If it is a running cost or keeps the business going, it is usually revenue. Use this as a guide and apply it to the facts.

Is a provision for bad debts allowed as a deduction?

No. A mere provision, whether general or specific, is not allowed. The debt must be written off as irrecoverable in the books and must have been taken into income earlier.

What happens if a bad debt that was allowed is recovered later?

The recovery is treated as business income in the year it is received. This applies to the extent the debt was allowed as a deduction earlier.

How do I compute business income step by step?

Take net profit from the profit and loss account. Add back inadmissible and capital items debited. Deduct admissible items not debited and any income taxed under another head. Show each adjustment with a short reason.