Allowable Expenses Under The New Income Tax Act: What Businesses Can Actually Claim

Every business owner eventually asks the same question during tax season: "Can I claim this as an expense?" It sounds simple, but the answer has always depended on a scattered set of provisions spread across the old Income-tax Act, 1961. The Income-tax Act, 2025, applicable from 1st April 2026, hasn't changed what's deductible in any major way  but it has regrouped the rules into a far more logical sequence, which genuinely helps when defending a claim during assessment.

This piece walks through what counts as an allowable expense for business and professional income under the new Act, where the rules tighten, and where businesses commonly go wrong.

The Basic Principle Hasn't Moved

An expense is deductible from business or professional income if it's incurred wholly and exclusively for the purpose of the business, is revenue (not capital) in nature, and isn't specifically disallowed elsewhere in the Act. That test, earlier housed in Section 37(1) of the 1961 Act, now sits in Section 34 under "General conditions for allowable deductions." The wording is cleaner, but decades of judicial interpretation on "wholly and exclusively" — including rulings on business purpose versus personal benefit — remain relevant, since the new Act doesn't overturn settled principles.

Specific Deductions: Rent, Repairs, and Insurance

Section 28 of the new Act consolidates what used to be spread across Sections 30, 31, and 38 of the old law — rent for business premises, current repairs to buildings and plant, insurance on stock and business assets, and land revenue or municipal taxes. A shopkeeper paying showroom rent, or a manufacturer insuring factory machinery, claims these under one reorganised section instead of three separate provisions.

One point worth flagging: capital repairs — say, a structural addition to a building — still don't qualify here. Only current, revenue-nature repairs do. This distinction trips up businesses more than any other issue in this category.

Employee-Related Expenses

Section 29 brings together deductions for employee welfare — contributions to provident fund, superannuation fund, gratuity fund, and other approved welfare schemes — provisions earlier spread across Sections 36 and 40A. The rule that employer PF and ESI contributions must actually reach the relevant authority by the due date under those laws to be deductible continues unchanged; a mere book entry doesn't suffice.

Practical example: A manufacturing unit deducts employees' PF contributions from salary in March 2027 but deposits them with the EPFO only in May 2027, missing the prescribed due date. That amount gets added back to taxable income for Tax Year 2026-27, even though eventually deposited — one of the most frequently missed disallowances in tax audits.

Bad Debts and Other Deductions

Bad debt write-offs, earlier under Section 36(1)(vii), now sit in Section 31. The debt must have been taken into account in computing income of an earlier year, or represent money lent in the ordinary course of a lending business, and must actually be written off in the books — not merely provided for. Banks and NBFCs get specific treatment for provisions on doubtful debts under the same section.

Section 32, "Other deductions," gathers residual items like interest on borrowed capital for business purposes, discount on zero-coupon bonds, and certain other allowances that don't fit neatly elsewhere. A trader paying interest on a working capital loan claims it here.

Where the Rules Genuinely Bite: Disallowances

Two sections matter more than most for compliance purposes.

Section 35 ("Amounts not deductible in certain circumstances") replaces the old Section 40, continuing to disallow interest, royalty, fees for technical services, or other sums payable outside India (or to a non-resident) without deduction of tax at source. It also caps remuneration to working partners in a firm and disallows certain payments to relatives or related parties where excessive and unreasonable.

Section 36 replaces Section 40A, disallowing cash expenditure exceeding ?10,000 to a single person in a day (?35,000 for transport operators), with the amount disallowed in full rather than partially. This remains one of the most litigated and commonly violated provisions, especially among smaller businesses still transacting heavily in cash.

Practical example: A trader pays a supplier ?15,000 in cash for goods in a single day, split across two separate ?7,500 vouchers to appear compliant. Tax authorities routinely aggregate same-day cash payments to the same person, and the entire ?15,000 gets disallowed under Section 36, not just the excess over ?10,000.

Actual Payment Basis: Section 37

Certain expenses — statutory dues, bonus, leave encashment, interest to banks and NBFCs, and payments to MSME suppliers — are deductible only in the year of actual payment, not merely when the liability accrues. This principle, earlier under Section 43B, now sits in Section 37. Most of these items still get a grace window: pay before the return's due date, and the deduction is allowed in the year the liability arose. The MSME payment clause is the sharp exception — miss the 15/45-day window prescribed under the MSMED Act, 2006, and the deduction shifts entirely to the year of actual payment, with no grace period.

Common Mistakes

Businesses frequently claim capital expenditure disguised as revenue repairs, hoping it slips through. They also underestimate how aggressively the cash payment limit under Section 36 gets applied — splitting a single transaction across vouchers doesn't help, since assessing officers look at aggregate payments to one person in a day, not individual voucher amounts. Another common slip is treating employer PF and ESI contributions as deductible on accrual, ignoring the actual-deposit requirement entirely.

Compliance Tips

Reconcile your PF, ESI, and other statutory dues against actual deposit dates each month, not just at year-end — catching a missed deadline early gives you time to correct it before the return is filed. Review your cash payment ledger for same-person aggregation before finalising accounts. And keep clear documentation distinguishing capital repairs from current repairs, since this is a recurring point of dispute during scrutiny assessments.

Frequently Asked Questions

Has the "wholly and exclusively for business" test changed under the new Act? No. It's now worded under Section 34, but the substance and judicial interpretation remain the same.

Which section now governs the ?10,000 cash payment disallowance? Section 36 of the new Act, replacing the old Section 40A(3).

Do PF and ESI contributions still need actual deposit to be deductible? Yes, unchanged. Book entries alone don't qualify; actual payment by the due date under the respective law is required.

Where do MSME payment rules now appear? Under Section 37, replacing the old Section 43B(h), with the 15/45-day payment window unchanged.

Are capital repairs deductible as a business expense? No. Only current, revenue-nature repairs qualify under Section 28; capital repairs must be capitalised.

Final Word

The list of allowable expenses hasn't shrunk or expanded under the new Act — it's simply better organised. Businesses benefit most by updating accounting checklists and expense-tracking systems to the new section numbers now, rather than discovering gaps during an assessment. If any expense claim feels borderline, check with your tax advisor before you file.