Section 32 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 32 lists eleven deductions, clauses (a) to (k), that are allowed in computing income chargeable under section 26. They include bonus or commission paid to an employee, interest on capital borrowed, a special reserve for financial institutions, the discount on a zero coupon bond, a loss on animals and securities transaction tax. This article explains them as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
Section 32 allows the following deductions in computing business or professional income: bonus or commission to employees (if not payable as profits or dividend); interest on borrowed capital (but not for the period before an acquired asset is first put to use); special reserve transfers by specified financial entities (up to 20 per cent of eligible profits, with an overall cap of twice capital plus general reserves); the discount on a zero coupon bond; market-to-market or expected losses under notified standards; and securities or commodities transaction tax. Several clauses depend on a notification or on rules.
Where this section sits
Section 32 is in Part D of Chapter IV. Section 31 (bad debts) comes before it, in our post on Section 31, and section 33 (depreciation) after it, in our post on Section 33. Section 28 and section 30, on rent, repairs and premiums, are in the article on sections 27, 28 and 30. If you want your own claims reviewed, our tax planning advisory team can help.
The eleven clauses
| Clause | Deduction allowed | Main condition printed in the text |
|---|---|---|
| (a) | Bonus or commission paid to an employee for services rendered | Only when the amount would not have been payable to the employee as profits or dividend if it had not been paid as bonus or commission |
| (b) | Interest paid on capital borrowed for the business or profession | Excludes interest on capital borrowed to acquire an asset, from the date of borrowing to the date the asset was first put to use, whether capitalised or not |
| (c) | Contribution paid by a public financial institution to the credit guarantee fund trust for small industries | As the Central Government may, by notification, specify |
| (d) | Pro rata amount of discount on a zero coupon bond | Calculated in the manner as may be prescribed |
| (e) | Amount carried to a special reserve by a specified entity | Not more than 20 per cent of eligible business profits; no deduction on the excess over twice paid-up capital plus general reserves |
| (f) | Expenditure (not capital) of a statutory corporation or body corporate | Notified by the Central Government for this clause; incurred for the objects authorised by its Act |
| (g) | Purchase of sugarcane by a sugar co-operative society | At a price equal to or less than the price fixed or approved by the Government |
| (h) | Marked to market loss or other expected loss | As computed as per the income computation and disclosure standards notified under section 276(2) |
| (i) | Expenditure by a company to promote family planning among its employees | Bona fide; capital expenditure is spread over five tax years |
| (j) | Difference between actual cost of animals (not stock-in-trade) and the amount realised from carcasses | Where animals have died or become permanently useless |
| (k) | Securities transaction tax or commodities transaction tax paid | Taxable transactions entered in the course of business and income included under business income |
Clause (a): bonus or commission
Bonus or commission paid to an employee for services rendered is allowed, but only when the amount would not have been payable to the employee as profits or dividend if it had not been paid as bonus or commission. The test looks at whether the payment is really a share of profits or dividend in the guise of bonus.
Clause (b): interest on borrowed capital
Interest paid on capital borrowed for the purposes of the business or profession is allowed, where:
- (i) it does not include interest on capital borrowed for acquiring an asset, whether capitalised in the books or not, for any period beginning from the date the capital was borrowed till the date the asset was first put to use; and
- (ii) recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies fulfilling the conditions as may be prescribed are deemed to be capital borrowed.
Example: interest before an asset is first used
Latha (invented) borrows on 1 June to buy a machine, and the machine is first put to use on 1 September. Interest for June, July and August, at Rs. 10,000 a month (invented), is Rs. 30,000. Under clause (b)(i), that Rs. 30,000 is not interest allowed under this clause. Interest from 1 September onward, on capital borrowed for the business, is within the clause. The Act does not say here how the excluded interest is otherwise treated; that is for the provisions on actual cost of assets (see our article on Section 39 and the actual cost of assets).
Clauses (c) and (d): credit guarantee fund and zero coupon bonds
- (c) The contribution is paid by a public financial institution to the credit guarantee fund trust for small industries "as the Central Government may, by notification, specify". What has been notified is not in the text consulted.
- (d) The deduction is the pro rata amount of the discount on a zero coupon bond, having regard to the period of life of the bond, calculated in the manner as may be prescribed. "Discount" means the difference between the amount received or receivable by the infrastructure capital company, infrastructure capital fund, public sector company or scheduled bank issuing the bond, and the amount payable on maturity or redemption. "Period of life of bond" runs from the date of issue to the date of maturity or redemption. The detail of the calculation is left to the Income-tax Rules, 2026.
Clause (e): special reserve of financial entities
The amount carried to a special reserve created and maintained by a specified entity is allowed, subject to:
- the amount not exceeding 20 per cent of the profits derived from an eligible business, computed under the head "Profits and gains of business or profession" before any deduction under this clause; and
- where the aggregate of the amounts carried to the reserve from time to time exceeds twice the paid-up share capital and general reserves of the specified entity, no deduction on the excess.
Specified entity means: a public financial institution as specified in section 2(72) of the Companies Act, 2013; a financial corporation that is a public sector company; a banking company; a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; a housing finance company; and any other financial corporation including a public company.
Eligible business is the business of providing long-term finance for (for the first four categories) industrial or agricultural development, development of infrastructure facility in India, or development of housing in India; (for a housing finance company) construction or purchase of houses in India for residential purposes; and (for any other financial corporation) development of infrastructure facility in India.
Infrastructure facility means a facility as defined in the Explanation to section 80-IA(4)(i) of the Income-tax Act, 1961 (the Act's own reference, quoted as printed) or any other public facility of a similar nature notified by the Board and meeting the prescribed conditions; an undertaking referred to in section 80-IA(4)(ii), (iii), (iv) or (vi) of that Act; and an undertaking referred to in section 80-IB(10) of that Act. The Companies Act, 2013 is another law; check it.
Example: special reserve cap
Rural Housing Finance Ltd (invented) is a housing finance company. Its eligible business profits before this deduction are Rs. 50,00,000. The 20 per cent limit is 50,00,000 x 20% = Rs. 10,00,000. Its paid-up share capital plus general reserves are Rs. 10,00,000, so twice that is Rs. 20,00,000. Earlier years' transfers to the special reserve total Rs. 12,00,000. Adding this year's Rs. 10,00,000 gives an aggregate of Rs. 22,00,000, which exceeds Rs. 20,00,000 by Rs. 2,00,000. No deduction is allowable on that excess, so the deduction for the year is 10,00,000 minus 2,00,000 = Rs. 8,00,000.
Clauses (f) and (g): statutory bodies and sugar co-operatives
- (f) Any expenditure, not being capital expenditure, incurred by a corporation or body corporate constituted or established by a Central, State or Provincial Act, if it is notified by the Central Government for this clause having regard to the objects and purposes of its Act, and the expenditure is incurred for the objects and purposes authorised by that Act.
- (g) Expenditure by a co-operative society engaged in the business of manufacture of sugar, on purchase of sugarcane, at a price equal to or less than the price fixed or approved by the Government.
Clause (h): marked to market and expected losses
Marked to market loss or other expected loss, as computed per the income computation and disclosure standards notified under section 276(2). The standards are notified; what has been notified is not in the text consulted.
Clause (i): family planning
Any expenditure bona fide incurred by a company to promote family planning amongst its employees. If the expenditure is of a capital nature, one-fifth is deducted in the tax year it was incurred and the balance in equal instalments over the four immediately succeeding tax years. Sections 33(11) and 112(3) apply as they do to depreciation, and sections 38(1)(c), 39(4) (Table: serial number 9), 45(6) and 45(10) apply to such an asset to the extent they apply to an asset representing capital expenditure on scientific research.
Example: capital expenditure on family planning
Vihaan Textiles Ltd (invented) incurs Rs. 5,00,000 of capital expenditure on a family planning facility for its employees. One-fifth is 5,00,000 / 5 = Rs. 1,00,000 in the tax year of expenditure. The balance of Rs. 4,00,000 is deducted in equal instalments over the next four tax years: 4,00,000 / 4 = Rs. 1,00,000 a year.
Clauses (j) and (k): animals and transaction taxes
- (j) The difference between the actual cost of animals used for the business or profession otherwise than as stock-in-trade and the amount realised from the carcasses or animals, where the animals have died or become permanently useless.
- (k) The amount paid as securities transaction tax or commodities transaction tax, if (i) the taxable securities or commodities transactions are entered into in the course of business during the tax year, and (ii) the income from them is included under the head "Profits and gains of business or profession".
Need help with business deductions?
Section 32 mixes simple claims, such as transaction tax, with conditions that depend on notifications and rules, such as the credit guarantee fund and zero coupon bonds. To check what applies to your business, see our tax planning advisory service.
Key takeaways
- Section 32 has eleven deductions, clauses (a) to (k), all in computing income under section 26.
- Interest on borrowed capital for an asset is not allowed from the date of borrowing until the asset is first put to use.
- A special reserve is limited to 20 per cent of eligible profits and to twice paid-up capital plus general reserves in aggregate.
- Capital expenditure on family planning is spread over five tax years, one-fifth each.
- Securities and commodities transaction tax is deductible if the income is business income.
- Notified items and prescribed methods are not in the text consulted.
Read next
- Section 35: amounts not deductible in computing business income
- Sections 27, 28 and 30: business profits, rent, repairs and premiums
- Section 31: bad debts
- Section 33: depreciation
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.