Tag: Tax Deductions

Management Notes

Tax on Capital Gain- Deductions [Sec. 82, 83, 84, 85, 86]

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The Income-tax Act, 2025 provides various deductions from capital gains where the consideration or capital gain arising from transfer of specified capital assets is reinvested in prescribed assets within the stipulated period. Sections 82 to 86 contain important provisions granting such deductions subject to fulfilment of specified conditions. These provisions broadly cover reinvestment involving a residential house, agricultural land, specified bonds or assets, and other eligible investments. The amount of deduction depends upon the relevant section, nature of the original asset, amount reinvested and prescribed limits. Failure to satisfy conditions may result in withdrawal of deduction and consequent taxation.

1. Section 82 – Transfer of Residential House

Section 82 provides deduction in respect of capital gain arising from the transfer of a long-term residential house, subject to the conditions prescribed under the Act. The deduction is available where the assessee invests the eligible amount in the purchase or construction of another residential house within the specified period. The amount deductible generally depends upon the capital gain and amount invested in the new residential property. Where the entire eligible capital gain is appropriately invested, the whole qualifying gain may be deductible. If only part is invested, deduction is correspondingly restricted. Violation of prescribed conditions can lead to withdrawal of deduction.

2. Section 83 – Transfer of Agricultural Land

Section 83 grants deduction where capital gain arises from transfer of eligible agricultural land and the prescribed conditions are satisfied. Broadly, the provision applies where the transferred land was used for agricultural purposes during the required period and the assessee purchases another agricultural land within the stipulated time. The amount of deduction is generally limited to the capital gain or the amount invested in the new agricultural land, whichever is lower, subject to statutory conditions. If the new agricultural land is transferred within the prescribed restricted period, the earlier benefit may be affected. Thus, Section 83 encourages reinvestment in agricultural land.

3. Section 84 – Investment in Specified Bonds/Assets

Section 84 provides deduction from eligible capital gains where the assessee invests the prescribed amount in specified assets or bonds, subject to the conditions contained in the Act. The investment must generally be made within the specified time period from the date of transfer of the original capital asset. The deduction is restricted to the eligible capital gain, qualifying investment and any statutory monetary ceiling applicable to the investment. The specified asset must ordinarily be retained for the prescribed period. Where it is transferred, converted or otherwise dealt with contrary to the conditions, the deduction may be withdrawn. This provision facilitates tax-saving reinvestment.

4. Section 85 – Transfer and Reinvestment in Specified Asset

Section 85 provides a capital-gain deduction in specified circumstances where the assessee transfers an eligible capital asset and makes reinvestment in the asset prescribed by the provision. Availability of the deduction depends upon the nature of the original asset, nature of the new investment, period within which investment is made and other statutory conditions. The deductible amount is determined according to the formula or limits prescribed under the section and cannot exceed the eligible capital gain. Where the new asset is transferred or the specified conditions are violated within the restricted period, the earlier deduction may become taxable according to the Act.

5. Section 86 – Capital Gain Deduction in Specified Cases

Section 86 provides deduction in respect of capital gains arising in the specified cases covered by the provision, subject to fulfilment of the prescribed investment and other statutory requirements. The assessee must utilise the relevant capital gain or consideration for acquiring the eligible new asset within the stipulated period. The quantum of deduction depends upon the amount invested and the manner of computation prescribed under the section. Where only part of the required amount is invested, the deduction may be proportionately restricted. Further, transfer of the new asset or violation of specified conditions within the prescribed period may result in withdrawal or adjustment of the deduction.

Management Notes

Deduction in Respect of employee Welfare [Sec 29 and 30], Depreciation [Sec. 33], Block of Assets [Sec. 2(17)], Scientific Research [Sec. 45]

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The Income-tax Act, 2025 provides several specific deductions while computing PGBP income. Sections 29–30 allow deductions for employer contributions toward employee welfare funds and certain insurance premiums. Section 33 governs depreciation on business assets, computed on the block of assets defined under Section 2(17). Section 45 permits deduction for scientific research expenditure connected with the business, covering both capital and revenue outlay, subject to prescribed conditions.

1. Deduction in Respect of Employee Welfare [Sec. 29 & 30]

Section 29 allows an employer deduction for sums paid toward a recognised provident fund, approved superannuation fund, contributions to a pension scheme (up to 14% of salary, including dearness allowance), and an approved gratuity fund created under an irrevocable trust, along with provisions made for gratuity payable during the tax year. Section 30 separately allows deduction for insurance premium paid on stocks/stores against damage, on cattle life by federal milk co-operatives, and on employee health insurance (via non-cash modes) under schemes approved by GIC or an IRDA-approved insurer, promoting comprehensive employee and asset welfare coverage.

2. Depreciation [Sec. 33]

Section 33 allows deduction for depreciation on tangible assets (buildings, machinery, plant, furniture) and specified intangible assets (know-how, patents, copyrights, trademarks, licences, franchises excluding goodwill) acquired on or after 1 April 1998, where owned wholly or partly and used wholly and exclusively for business. Depreciation is computed at a prescribed percentage of the written down value of the relevant block of assets. Where an asset within a block is partly used for business, the deduction is proportionately restricted. Assets used for less than 180 days in the tax year of acquisition are restricted to 50% of the prescribed rate.

3. Block of Assets [Sec. 2(17)]

The term “block of assets”, as defined under Section 2(17), refers to a group of assets falling within the same class being either buildings, machinery, plant, or furniture, or specified intangible assets in respect of which the same rate of depreciation is prescribed. Instead of computing depreciation asset-by-asset, the Act adopts this pooled approach, where additions and deletions during the tax year adjust the block’s written down value collectively. This concept simplifies depreciation computation, capital gains treatment on block disposal, and consistent tracking of asset groups across tax years.

4. Scientific Research [Sec. 45]

Section 45 allows deduction for expenditure — capital (excluding land acquisition) or revenue incurred on scientific research related to the assessee’s business. Additionally, expenditure incurred within three years preceding commencement of business, on salary to research employees or purchase of materials, is also deductible in the year of commencement. Where such capital expenditure is represented by an asset, ordinary depreciation under Section 33 cannot additionally be claimed on it. Disputes on whether an activity qualifies as scientific research are referred to the Central Government or a prescribed authority, whose decision is final.

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