Section 36 of the Income Tax Act: Complete Guide & Allowable Deductions

Summary Points:
 

1. Section 36 of the income tax helps businesses claim genuine costs; it allows deductions for expenses like bad debts, insurance, employee bonuses, and regulatory charges, ensuring only real profits are taxed.
    
2. Fintech companies get big benefits as Section 36 reduces tax by allowing costs like loan losses, compliance fees, and employee expenses.
    
3. It promotes fair and compliant taxation by preventing extra tax payments, encouraging proper accounting, and ensuring firms pay tax only on real profits.

Section 36 of the Income Tax Act allows specific business expenses as tax deductions, ensuring only real profits are taxed fairly.

Let’s understand it with the help of an example:

Ravi, a 38-year-old fintech entrepreneur from Bengaluru, runs a digital lending company. His start-up earned ₹50,00,000 in FY 2024–25. Out of this, he spent ₹5,00,000 on employee insurance, ₹3,00,000 on bad debts, and ₹2,00,000 on marketing. As per Section 36, these expenses qualify for deduction. 

So, instead of paying tax on ₹50,00,000, Ravi pays tax only on ₹40,00,000. With a 30% tax rate, he saves almost ₹3,00,000. This shows how Section 36 of the income tax helps fintech companies lower tax burdens by recognising genuine business costs.

Every business incurs expenses to keep operations running. For fintech companies, costs may include loan defaults, employee insurance, and compliance fees. Section 36 of the Income Tax Act, 1961, gives relief by allowing these expenses as deductions before calculating taxable income.

This section is not just about tax saving; it promotes fair taxation. A company should be taxed on its actual profits, not on income inflated by unavoidable costs. Fintechs, banks, and start-ups especially benefit from this because they deal with loans, payments, and regulatory charges regularly.

In this blog, we will explore Section 36 of the income tax in detail, understand the deductions it covers, see examples, and look at its importance in the fintech industry.

Key Provisions under Section 36 of The Income Tax Act:

Section 36 of the income tax lists many expenses that businesses can deduct. Some of the important ones include:

• Insurance premium for employees.
   
• Bad debts written off.
   
• Bonus or commission to employees.
   
• Banking and regulatory charges.

The table below explains the most common deductions that fintech companies and other businesses can claim under Section 36.

Common Deductions Allowed under Section 36 of the Income Tax:
 

From the above table, we see that Section 36 of the income tax offers wide relief, ensuring that necessary business costs are not unfairly taxed.

Bad Debts and Provisions under Section 36(1):

Bad debts are common in fintech lending. A loan may not always be repaid, and if the company writes it off in its books, it can be claimed under Section 36 of the Income Tax.

Let’s understand it with the help of an example:

Let’s say Ankit, who runs a peer-to-peer lending platform. He gave out loans worth ₹10,00,000. Borrowers repaid only ₹7,00,000, and ₹3,00,000 remained unrecoverable. Since he wrote this off in his accounts, the ₹3,00,000 qualifies as a deduction.

The following table explains how bad debt deduction works practically for fintech lenders:

Bad Debt Deduction Example
 

This shows that Section 36 of the income tax gives fintech companies some protection against losses by allowing bad debts as a deduction.

Insurance Premium Deduction under Section 36

Insurance is a must for businesses. For fintech companies, it could mean employee group health insurance, insurance for office assets, or protection for data servers. Section 36 of the Income Tax allows these costs as deductions.

Let’s understand it with the help of an example:

Let’s say Meera, who runs a payment gateway firm, pays ₹4,00,000 for employee medical insurance and ₹2,00,000 for server insurance. Both qualify as deductions under Section 36. However, if she pays ₹1,00,000 for her personal insurance, it is not allowed.

Here is a breakdown of how insurance premium deductions are allowed under Section 36:

Insurance Deduction Scenario
 

The table shows that only business-related insurance costs qualify, not personal ones, ensuring fairness in tax deductions.

Other Key Deductions under Section 36:

Apart from bad debts and insurance, Section 36 of the income tax also covers:

• Bonus and commission to employees.
   
• Regulatory charges like SEBI/RBI fees.
   
• Employer contributions towards staff welfare.

Let’s understand it with the help of an example:

Let’s say Arjun, who owns a digital loan app, pays ₹2,50,000 as bonuses, ₹1,20,000 to SEBI as compliance fees, and ₹50,000 as late payment fines. Out of these, only the bonus and SEBI fees qualify.

This table highlights how different types of miscellaneous expenses are treated under Section 36.

Deduction Examples
 

As seen, Section 36 of the income tax is strict. It only allows genuine business costs, while penalties or fines are excluded.

Importance Of Section 36 In The Fintech Industry:

For fintech start-ups and companies, Section 36 of the income tax is very valuable. It:
 

• Helps reduce effective tax liability.
   
• Recognises real business losses like bad debts.
   
• Promotes compliance by recognising SEBI/RBI fees.
   
• Ensures employee welfare costs like insurance and bonuses are tax-deductible.

Let’s understand it with the help of an example:

Let’s say a fintech company with ₹1 crore income and ₹20,00,000 in allowable Section 36 deductions will be taxed only on ₹80,00,000, saving nearly ₹6,00,000 at a 30% rate.

Let us summarise why Section 36 of the Income Tax is so critical for fintechs:

• Tax Savings: Deductions reduce taxable income significantly.
   
• Fairness: Companies are taxed only on actual profits.
   
• Compliance: Encourages payment of regulatory charges.
   
• Support for Start-ups: Helps new fintechs with heavy initial costs.

These points clearly show how Section 36 of the income tax promotes growth and stability in the fintech space.

Conclusion:

Section 36 of the Income Tax Act ensures that only genuine profits are taxed. By allowing deductions for bad debts, insurance premiums, bonuses, and regulatory costs, it supports businesses and encourages compliance.

For fintech companies, where risks of defaults and regulatory fees are high, Section 36 of the income tax becomes even more important. It reduces unnecessary tax burdens, strengthens financial planning, and ensures that taxes are paid fairly.

Section 36 of the Income Tax is not just a legal clause; it is a relief mechanism for businesses trying to grow in today’s competitive environment.

FAQs:

Q1. Can fintech companies claim bad debts under Section 36 of the Income Tax?
Yes, provided the debts are written off in the company’s books.

Q2. Is personal insurance deductible under Section 36 of the Income Tax?
No, only business-related employee or asset insurance is eligible.

Q3. Can unpaid bonuses be claimed as deductions?
No, bonuses must be paid within the due date to qualify.

Q4. Why is Section 36 of the Income Tax important for fintech firms?
It lowers tax liability, supports compliance, and protects businesses from overpaying taxes.

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LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.