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Tax Laws and Practice · Profits and Gains from Business and Profession

Allowable Deductions in Computing Business Income

Updated 11 October 2026 · Fact-checked

Allowable deductions are business expenses the Income-tax Act, 2025 lets you subtract from business receipts. Each needs a specific provision, a business purpose and no bar. To solve: list each item, find its section, check conditions (use, write-off, limits), apply any proportion, then total the allowed amounts.

Understand Allowable Deductions in Computing Business Income

Business income is not just receipts. You tax the net profit, so genuine business costs reduce the tax. But the Act does not allow every cost. It allows costs that fit a specific provision and rejects those that are capital, personal or barred.

Start with the charge. Section 26 makes profits and gains of a business or profession chargeable under that head. It also adds items such as compensation on termination of agency or management, export incentives, and keyman insurance receipts. Deductions are then taken against this income.

Section 28 covers the everyday costs of premises, machinery, plant and furniture used for business. These are insurance premium against damage or destruction, land revenue, local rates or municipal taxes, rent paid as tenant, and repairs. Repairs must be current repairs, not capital expenditure. If the asset is used only partly for business, only a fair proportionate part is allowed, as determined by the Assessing Officer.

Section 31 covers bad debts. A bad debt is allowed in the tax year it is written off as irrecoverable in your accounts, if it was already taken into income (or is money lent in the ordinary course of banking or money lending). A mere provision for bad debts is not a bad debt. Only specified banks and financial institutions get a limited deduction for provisions.

Other items you will meet, such as interest on borrowed capital for business and employer contributions to staff funds, follow their own conditions in your study material. Use the same test each time: is it business, is it revenue in nature, is a provision available, and is any limit or bar triggered.

Key rules to remember

Premises, plant and furniture costs (Section 28(1))
Allowed: insurance premium + land revenue, local rates, municipal taxes + rent (as tenant) + current repairs
Repairs must not be capital in nature. Where the occupier is a tenant, repairs are allowed only if he has undertaken to bear their cost.
Partial business use (Section 28(2))
Allowed = Section 28(1) amount × fair business-use proportion
Applies where the asset is partly used or not wholly and exclusively used for business. The proportion is determined by the Assessing Officer.
Bad debt write-off (Section 31(2))
Deduction in the year of write-off in accounts, if already taken into income (or banking/money-lending loan)
A provision for bad and doubtful debts is not a written-off bad debt (Section 31(3)(a)).
Recovery shortfall (Section 31(2)(b))
If recovery < (debt − amount deducted), the deficiency is deductible in the year of ultimate recovery
This is the Act's condition for later recoveries of written-off debts.
Provision limit: scheduled and non-scheduled banks, co-operative banks (Section 31(1))
Up to 8.5% of total income before this deduction and Chapter VIII + up to 10% of aggregate average advances of rural branches
Excludes foreign banks, and primary agricultural credit societies and primary co-operative agricultural and rural development banks. Rural-branch advances are computed as prescribed.
Provision limit: foreign banks, public financial institutions, State Financial/Industrial Investment Corporations, NBFCs (Section 31(1))
Up to 5% of total income before this deduction and Chapter VIII
Total income is taken before the provision deduction and before Chapter VIII deductions.
Non-resident head office expenditure (Section 60)
Limit = 5% of adjusted total income (or 5% of average adjusted total income if adjusted total income is a loss)
Applies to head office expenditure incurred outside India that is attributable to the business in India.
Interest on bad or doubtful debts of specified financial institutions (Section 56)
Taxable in the year credited to profit and loss account or actually received, whichever is earlier
This is a charging rule, not a deduction.

How to solve Allowable Deductions in Computing Business Income questions

Use this sequence for any question on allowable business deductions. It keeps you from missing conditions that examiners test.

  1. 1List every expense and receipt in the question. Mark each as business or personal, and revenue or capital.
  2. 2Match each expense with its provision, such as Section 28 for premises costs or Section 31 for bad debts. Name the section in your answer.
  3. 3Check the conditions: business use, current (not capital) repairs, tenant undertaking, write-off in accounts, earlier inclusion in income.
  4. 4Apply the proportion under Section 28(2) where the asset is not wholly used for business.
  5. 5Apply limits for provisions: 8.5% or 5% of total income before the deduction, depending on the type of assessee.
  6. 6Reject items that fail, with a one-line reason, such as a provision that is not a write-off.
  7. 7Total the allowed amounts and state the conclusion clearly.

Quickest way: Three-filter check

When to use it: Use it for short-note or small-sum questions where you must decide quickly what is allowed.

  1. Filter 1: is the cost capital or personal? If yes, reject it.
  2. Filter 2: is there a section that names it, such as insurance, rates, rent, current repairs or a written-off bad debt? If no, check your study material before claiming it.
  3. Filter 3: is there a limit or proportion? Apply the business-use fraction or the provision cap. Then add up.

Common mistakes in Allowable Deductions in Computing Business Income

  • Allowing a provision for doubtful debts as a bad debt for a trader

    Students see 'doubtful debts' in the accounts and treat it like a write-off.

    Fix: Allow only debts actually written off as irrecoverable in the accounts. Under Section 31(3)(a) a write-off does not include a provision.

  • Allowing capital repairs or improvements under Section 28

    The word 'repairs' is read without the qualifier.

    Fix: Section 28 allows only current repairs not in the nature of capital expenditure. Reject extensions, renovations that add value or improve the asset.

  • Ignoring the business-use proportion

    The student adds all rent and insurance without reading usage facts.

    Fix: Look for words like 'partly used for business'. Apply Section 28(2) and allow only the fair proportion.

  • Allowing a bad debt that was never part of income

    Students think any unpaid amount can be written off.

    Fix: Check the condition: the debt must have been taken into income of that year or an earlier year, unless it is money lent in the ordinary course of banking or money lending.

  • Applying the 5% cap to a bank, or 8.5% to an NBFC

    The two limits in the Section 31 table are mixed up.

    Fix: Scheduled, non-scheduled and eligible co-operative banks get 8.5% plus the rural-branch amount. Foreign banks, PFIs, SFCs, SIICs and NBFCs get 5%. Both are on income before the deduction.

  • Treating Section 60 as a general deduction

    Head office expenditure sounds like any business cost.

    Fix: Section 60 applies only to non-residents and is capped at 5% of adjusted total income, or of average adjusted total income if there is a loss.

Worked examples

Example 1

Ravi Traders, a proprietary firm, runs its business from rented premises. During the year it paid rent ₹3,00,000, municipal taxes ₹30,000, insurance premium against fire ₹10,000 and current repairs ₹25,000 (Ravi has undertaken to bear repairs under the lease). It also spent ₹1,00,000 on a capital improvement. The premises are used 75% for business and 25% for residence. Compute the allowable deduction.

Show the solution
  1. Identify items under Section 28(1): rent as tenant (c), municipal taxes (b), insurance premium (a), repairs borne under tenancy undertaking (e).
  2. The ₹1,00,000 improvement is capital expenditure. Reject it.
  3. Total eligible: 3,00,000 + 30,000 + 10,000 + 25,000 = ₹3,65,000.
  4. The premises are not wholly used for business, so Section 28(2) restricts the deduction to the fair proportion.
  5. Allowed = 3,65,000 × 75% = ₹2,73,750.

Answer: ₹2,73,750 is allowable. The capital improvement of ₹1,00,000 and the private-use share are not allowed.

Example 2

Mehta Enterprises, a trader, shows: debtor A ₹60,000 (sale already included in income) written off as irrecoverable in accounts; provision for doubtful debts created ₹25,000; loan of ₹15,000 given to a friend, written off, not part of its money-lending business. Separately, Sunrise Finance Ltd, an NBFC, has total income of ₹80,00,000 before any deduction under Section 31(1) and Chapter VIII. Find the bad debt deduction for Mehta and the maximum provision deduction for Sunrise.

Show the solution
  1. Debtor A: written off in accounts and already taken into income. Allowed under Section 31(2): ₹60,000.
  2. Provision of ₹25,000: a provision is not a bad debt written off (Section 31(3)(a)), and Mehta is not a specified bank or financial institution. Not allowed.
  3. Loan to friend ₹15,000: not taken into income and not money lent in ordinary course of banking or money lending. Not allowed.
  4. Mehta's deduction = ₹60,000.
  5. Sunrise is an NBFC, so the Section 31(1) cap is 5% of total income before the deduction and Chapter VIII.
  6. Cap = 5% × 80,00,000 = ₹4,00,000.

Answer: Mehta Enterprises: ₹60,000. Sunrise Finance Ltd: provision deduction up to ₹4,00,000.

Exam tips

  • Cite the section next to each item: Section 28 for premises costs, Section 31 for bad debts, Section 60 for non-resident head office expenditure.
  • In bad debt questions, always state the two tests: written off in accounts and already taken into income (or banking or money-lending loan).
  • For provision limits, identify the type of assessee first. The 8.5% and 5% rates come from the table in Section 31(1).
  • Write the answer in ICSI style: provision, facts, conclusion. A one-line reason for each rejected item earns marks.
  • Do not mix Income-tax Act, 1961 section numbers with the 2025 Act. Use the 2025 Act numbering for June 2027.

Practice questions from Profits and Gains from Business and Profession

Allowable Deductions in Computing Business Income in other exams

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

Allowable Deductions in Computing Business Income: frequently asked questions

Is rent for business premises allowed as a deduction?

Yes. Rent paid when the assessee occupies the premises as a tenant is allowed under Section 28(1)(c). If the premises are only partly used for business, only the fair proportionate part is allowed under Section 28(2).

Can I claim a provision for bad debts?

Only specified banks and financial institutions can claim a provision, and only up to the limits in Section 31(1). For other assessees, only debts actually written off as irrecoverable qualify. A provision is not a write-off.

What if a written-off bad debt is partly recovered later?

Section 31(2)(b) deals with this. If the amount recovered is less than the difference between the debt and the amount already deducted, the deficiency is deductible in the year of ultimate recovery.

Are repairs always deductible?

No. Only current repairs not in the nature of capital expenditure are allowed. For a tenant, repairs are allowed only where he has undertaken to bear the cost under the tenancy.

Who can claim head office expenditure under Section 60?

Only a non-resident assessee, for head office expenditure incurred outside India and attributable to its business or profession in India. The deduction is capped at 5% of adjusted total income, or of average adjusted total income if adjusted total income is a loss.