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Tax benefits on business loans in India

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There are several benefits of availing loan for business in India and one such benefit is the tax benefit. Under section 36 1 iii of the IT Act 1961, the interest amount paid on the borrowed capital can be deducted from the income base. Tax slab percentage is applied on the taxable income base. Reduction in the taxable income base can considerably lower the amount of taxes due from any business entity.

There can confusions while claiming tax benefits specified under different sections of IT Actas to whether to claim benefit on the interest or the principal amount.

Ultimately, the borrower must repay both the principal and the interest of the borrowed funds. In case of business loans, the borrower repaysthe amount through EMIs. Several sections of the IT Act extend tax benefits for expenditures or investments made by businesses. Even if investments and expenditures are made with borrowed funds, benefits under these sections should apply. Hence, the business should be eligible to claim benefits for both the interest and the principal component of the business loan under specified conditions of the IT Act.

Sections of Income Tax Act, 1961 and tax benefits for business

Knowledge of applicable sections of taxation of business incomes enables maximum tax benefits on business loans in India. Following are the sections under IT Act that primarily deal with deduction and taxation benefits for business entities:

Deductions applicable against profits & gains from profession or business:

IT Act 1961 sectionDescriptionType of business entity
   
Section 30For following expenses on premise:rates,rent, taxes, repairs, (excluding capital expenditure) and insuranceAll business entities
Section 31For following expenses on plant and machinery and furniture: repairs (excluding capital expenditure), insuranceAll business entities
Section 321 i, 32 1 ii, 32 1 i a, 32 1 ii aDepreciationGeneration or distribution of power, manufacturing, all business entities
Section 32 ACInvestment allowance @ 15 % of actual cost of investment made in new asset purchase/installationManufacturing and production
Section 32 ADInvestment allowance @ 15 % of actual cost of investment made in plant and machineryManufacturing business in notified backward areas
Sections 33 A, 33 AB, 33 ABADevelopment allowances @ 50% and other tax benefitsTea, coffee, rubber. Plantation, production and extraction of petroleum/natural gas
Sections 35 1 i, 35 1 ii, 35 1 i a, 35 1 ii a, 35 1 iii, 35 1 iv, 35 – 2, 35-2AA, 35-A, 35-AB,35 ABA, 35 ABB, 35 ACDeductions up to 200% allowed on scientific research, on setting up institution, college, expenses (including capital expenditures) on projects like rural development, conservation, agricultural extension, afforestation, skill development payment to national lab, payment to any IIT, payment to public sector company, local authority, approved association or institution payment for getting technical knowhow, spectrum of telecommunication services, license to operate telecommunication,All business entities
36 1 iiiInterest on borrowed capitalAll entities
36 1 i b, 36 1 ii,  36 1 iii a, 36 1 iv, 36 1 iv a, 36 1 v, 36 1 v a, 36 1 vi, 36 1 vii, 36 1 viii, 36 1 viiia, 36 i ix, 36 1 xi, 36 1 xii, 36 1 xiii, 36 1 xiv, 36 1 xv, 36 1 xvi, 36 1 xvii, 36 1 viiiInsurance premium, employee bonus/compensation, contributions to PF, PS, GF, bad debts, special resource fund transfer, family planning promotion, taxes paid etc.All entities, special entities under government, cooperatives etc.
   
Section 37-1Other expenditures [excluding personal/capital expenditure and expenditures mentioned in sections 30 – 36] exclusively for business/professionAll entities

Income tax filing for business/professional entities

The following should be attended to while filing income tax for income from business/profession.

  • Choose appropriate filing form as per business/profession type
  • Apply all applicable tax deduction benefits under IT sections
  • Apply all applicable tax exemption benefits under IT sections
  • Deduct all taxes already paid like TDS, advance taxes, GST, etc.
  • Apply rebate wherever applicable

IT Act 1961 Section 36 1 iii scope and limitations

Section 36 1 iii IT Act 1961 has several scopes and limitations of tax benefits claim by business entities, these can be summarized as:

Tax benefit on interest vs. tax benefit on principal

Business entities are eligible for deductions based on the type, nature, and form of business. Sections and subsections under sections 30-37 of the IT act prescribe conditions for eligibility of businesses for deductions, exemptions, rebates, and other benefits on busines loan in India.For example, under section 32 AC, if the investment has been made by a business entity for acquiring a new asset,the entity is eligible for 15% investment allowance (subject to specified conditions). The 15%investment allowance is calculated on the actual cost of investment made ina new asset.

Let us take example of a business entity eligible u/s 32 AC for investment allowance.The business entity will be eligible to claim investment allowance benefit on the actual cost of the new asset at the time of purchase. If the entity uses a borrowed capital for purchasing the asset,theentity should be eligible to claim tax deduction benefit for the interest paid on fundsborrowed under section 36 1 iii. In addition, the entity should be able to claiminvestment allowance benefit under section 32 AC for the principal amount paid in that financial year (the principal amount being the actual cost of plant and machinery).

Tax deduction benefit on borrowed capital against EMI payment

The EMI has principal amount payment and interest payment components. Entity can ask lending institution to specify interest and principal part. Principal and interest components have differential tax treatments under different sections of the IT Act. Business entity can be eligible for multiple tax benefits under IT Act sections.

Under EMI payment arrangement business entity does not incur cost of principal as lump sum. Hence while filing IT returns for deduction benefit applying to principal part such as u/s 32 AC, assessee should be able toclaim investment allowance benefit on amount of principal paid for the financial year.However it is best to consult with business tax consultant before final submission of ITR.

Type of business entity

U/s 36 1 iii of income tax act 1961 tax benefits for business loans in India can be availed by all assesses. Any type of business entity filing income tax returns can claim deduction for interest on borrowed capital under this section.

Exceptions for claiming tax benefit u/s 36 1 iii

If business borrows fund for acquiring capital asset, then TDB towards interest paid can be claimed from period when asset is put to business use. For capital asset which has not been used in the business yet, TDB applicable u/s 36 1 iii on interests paid on borrowed capital cannot be claimed. 

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