Expenses Allowed for Deductions Under Section 36 of the IT Act for NRIs

When Non-Resident Indians (NRIs) operate a business or make investments in India, it's crucial to understand the allowable tax deductions. Under Section 36 of the Income Tax Act, 1961, specific business expenses are permitted as deductions, which helps reduce the overall taxable income. These deductions primarily cover expenses that are directly related to business operations, employee benefits, financial transactions, and statutory contributions.

Section 36 provides a structured list of expenses that businesses can claim. It includes interest on borrowed capital, insurance premiums, contributions towards provident funds, and gratuity schemes. For NRIs running a business in India, investing in a financial institution, or engaging in trading activities, these provisions are important

However, to claim these deductions, the expenses must be genuine, properly documented, and incurred entirely for business purposes. It must also comply with the provisions of the Income Tax Act, 1961 and relevant tax rules. In this blog, we will explore the permitted deductions to help NRIs optimize their tax liability.

Interest on Borrowed Capital

The interest paid on capital borrowed for business purposes can be claimed as a deduction. To finance business operations in India, NRIs may borrow funds from Indian banks or financial institutions

Interest paid on such loans can be deducted if the loans are used only for business purposes. Cross-border borrowing arrangements must adhere to the regulations of the Reserve Bank of India (RBI).

Contribution to National Pension System (NPS)

Contributions made by the employer to the National Pension System are deductible. NRI-owned companies can contribute to employee NPS accounts and claim deductions for such contributions as part of the employee benefit expenses.

Provision for Bad Debts To Banks and Certain Financial Institutions

For provisions created for bad debts, banks and specified financial institutions can claim deductions. This provision mainly applies to financial institutions regulated by the Reserve Bank of India (RBI). 

Insurance Premium Payment 

For insurance premiums paid to protect business assets, machinery, employees, or inventories, businesses may claim deductions. NRIs who operate businesses or own commercial assets in India can claim deductions for insurance premiums.

This applies if the insurance policy is directly related to business activities in India. For example, insurance for factory equipment, office property, or business inventory may qualify for deductions under Section 36. 

Contribution to Approved Gratuity Fund 

Employers can claim deductions for contributions made to an approved gratuity fund incorporated for employee retirement benefits. To qualify for deductions for businesses owned by NRIs, the business must ensure that the gratuity fund is approved by the tax authorities. 

Expense for Promoting Family Planning Amongst Employees

For expenses incurred in promoting family planning programs for employees, companies may claim deductions. Although it is rarely used today, NRI-owned companies that conduct such employee welfare programs can claim these expenses as deductions. 

Amount Paid as Securities Transaction Tax (STT)

Businesses that are engaged in securities trading can claim deductions for Securities Transaction Tax (STT). NRIs trading in Indian stock markets through business entities may claim Securities Transaction Tax (STT) as a deductible expense. 

Marked to Market Loss 

For marked-to-market losses recognized in accordance with accounting standards, the business may claim deductions. NRIs operating financial trading businesses in India can claim such losses if they are treated in accordance with approved accounting practices and tax rules. 

Amount Paid as Commodities Transaction Tax (CTT)

For commodities transaction tax paid during commodity trading, a deduction is allowed. This tax can be claimed as a deductible expense by NRIs engaged in commodity trading in India. 

Expenses Incurred by Corporation 

Some statutory corporations may claim deductions for NRIs for certain expenses incurred in their operations. NRIs who hold investments in Indian corporations must ensure that such expenses are properly recorded for tax deduction purposes. 

Payment to the Credit Guarantee Fund Trust for Small Scale Industries

Payments made to the credit guarantee fund trust for micro and small enterprises are deductible. This deduction is available to NRIs investing in or lending to small businesses in India through financial institutions supporting MSMEs.

Banking Cash Transaction Tax

Earlier, businessess were allowed to claim deductions for banking cash transaction tax. Although this tax has been abolished, it may still appear in historical tax records for older assessments.

Contribution to Staff Welfare Schemes

Expenses incurred for employees' welfare schemes can be deducted. It includes health programs, canteens, recreational activities, and welfare funds.

NRI entrepreneurs who manage Indian companies can claim deductions for lawful staff welfare expenses. This applies until the expenses are incurred only for business purposes.

Contributions to Recognised Provident Fund

Employer contributions made to a recognized provident fund for employees can be claimed as deductions. If an NRI operates a business in India and employs staff, the contributions made to a recognized provident fund for employees will qualify as a deduction. It applies only if they comply with Indian labor and tax regulations. 

Allowances For Dead Animals Used in Business

Businesses that are mainly dependent on animals for their business operations can claim deductions for losses incurred due to the death of animals used in the business.

This provision is mainly beneficial for agricultural or dairy-related businesses. NRIs who are a part of such ventures in India can claim deductions if the animals used for business purposes die during the operations. 

Expenses Incurred by Co-Operative Society for Sugarcane Purchase

Co-operative societies that are engaged in producing sugar can claim deductions for the expenses incurred in purchasing the sugarcane. This provision is less common for NRI investors and applies mainly to Indian cooperative institutions. 

Transfer to Special Reserves 

For transferring profits to special reserves, certain financial corporations are allowed deductions. NRIs who invest in financial corporations or housing finance companies in India can find this deduction reflected in corporate tax filings. 

Bad Debts Written Off

Bad debts incurred from business transactions that are written off in the books of accounts can be claimed as a deduction. NRIs who operate a business in India, mainly in the field of export or service-based business, can claim deductions for bad debts. This applies if the receivable becomes unrecoverable and is written off in financial statements. 

Discount on Zero-Coupon Bonds (ZCB)

Companies that issue zero-coupon bonds can treat the discount on such bonds as a deductible expense until the bonds mature. While the company claims deductions, NRIs investing in Indian companies that issue ZCBs must understand that the investor may be taxed on gains at maturity under applicable tax provisions. 

Bonus or Commission Paid to Employees

Bonuses or commissions paid to employees for services provided during the year are allowed as a deduction, provided they are reasonable and linked to employment. 

NRIs owning a company or startup in India can also claim a deduction for employee bonuses or commissions as business deductions. However, the payments must not reflect profit distributions to shareholders and must be properly documented in payroll records. 

To Conclude 

NRIs must understand these provisions when running a business in India, investing in financial institutions, or participating in trading activities. These deductions mainly cover expenses directly related to business operations, employee benefits, statutory contributions, and financial transactions. Under Section 36 of the Income Tax Act, you get a structured list of the expenses that businesses can claim, including those owned or managed by NRIs. 

Additionally, to better understand the permitted deductible expenses, seek guidance from an expert at Savetaxs. At Savetaxs, we have a team of experts who can help you understand the available deductions and ensure compliance with the RBI regulations. Our team can help NRIs optimize their tax liability and improve their overall financial efficiency in India. Contact us right away as we are working 24/7 across all time zones.