Guide · Costs and taxes · Updated 2026-09-18

A laptop is not a deduction, and four of the section numbers you were citing now mean something else

Ask a trader which costs are deductible and you get a list. Ask which are deductible this year and the list falls apart. The argument that costs money is not allowed against disallowed, it is revenue against capital.

A disallowed expense is money you never get back. A capital item is money you get back on a schedule you did not choose. Traders routinely deduct the second as though it were the first, which overstates year one, understates every year after, and leaves a block of assets that reconciles to nothing.

The test has four limbs, and only one of them is interesting

Section 37(1) is a residual provision, which is the first thing most summaries get wrong. It applies to expenditure not being of the nature described in sections 30 to 36, and those sections take priority. Premises costs go to section 30, plant repairs and insurance to section 31, depreciation to section 32, interest on borrowed capital and Securities Transaction Tax to section 36. Only what is left reaches section 37(1), and that ordering decides which condition you have to satisfy: a trader claiming workspace rent is tested against section 30, not against the wholly-and-exclusively language at all.

What remains in section 37(1) is tested on four limbs. The expenditure must not be capital in nature. It must not be personal. It must be laid out wholly and exclusively for the purposes of the business. And, under the explanation to the sub-section, it must not be incurred for a purpose that is an offence or prohibited by law.

A computer is a block, not a bill

The capital test is not about size. A three thousand rupee item consumed within the year is revenue. A forty thousand rupee item still working in three years is capital. The question is whether the spend brings an advantage enduring beyond the year, and hardware does by definition.

Capital items are relieved under section 32, which does not depreciate individual assets. It depreciates blocks. Every asset carrying the same rate sits in one pool, additions go in, disposals come out, and the rate applies to the written down value of the pool. Computers, servers, peripherals and computer software sit in a block carrying forty percent. General plant, where a mobile handset ordinarily sits, carries fifteen. Furniture and fittings carry ten.

By the fifth year about ninety two percent of the cost has been allowed. Nothing was denied. The relief arrived on a curve rather than in a lump.

Two conditions attach and both are missed regularly. The asset must be put to use, not merely bought, so an invoice dated in March for a machine first switched on in April belongs to the following year. And where an asset is put to use for fewer than one hundred and eighty days in the year of acquisition, only half the depreciation is available: the same computer used from January yields 24,000 rather than 48,000, with the rest recovered through the block later.

A third condition is not about timing at all. The second proviso to section 43(1) excludes from the actual cost any amount paid to a person in a day in cash above ten thousand rupees. It never enters the block and is not treated as cost on a later sale. Paying cash for hardware turns a delay into a permanent denial.

The cost stack on the contract note is not turnover, and all of it is deductible

Every trade carries brokerage, exchange transaction charges, Securities Transaction Tax, goods and services tax, stamp duty and a regulator turnover fee. None form part of turnover for deciding audit applicability, a point worked in the companion guide on how turnover is computed. All are deductible, by different routes.

Brokerage, exchange charges and stamp duty reach section 37(1) as ordinary revenue costs. Goods and services tax on brokerage is deductible rather than recoverable for a reason worth knowing: securities are excluded from the definitions of both goods and services, so trading in them generates no taxable output against which an input credit could be set off.

Securities Transaction Tax has a history and does not travel through section 37(1) at all. Its own provision at section 36(1)(xv) allows STT paid on taxable securities transactions entered into in the course of business. Before the financial year beginning April 2008 the relief was a rebate under section 88E, computed against tax rather than income, and that section went when the deduction replaced it. Section 40(a)(ib) still bars STT where the same transactions are computed as capital gains, so the character of the income decides whether the tax is relieved at all, which ties this to how derivatives income is characterised.

One row is deliberately absent because it is contested rather than settled: the cost of education. Expenditure keeping an existing business skill current is ordinarily revenue. Expenditure equipping you to enter an activity you were not previously carrying on looks like an enduring advantage, which is the signature of capital. Anyone calling it simply deductible has not read the other side.

Apportionment is a computation, not a concession

Section 38(2) decides most real disputes here. Where a building, machinery, plant or furniture is not exclusively used for the business, every deduction attaching to it, depreciation included, is restricted to a fair proportionate part having regard to actual use. It prescribes no percentage and no method, only fairness on the facts, which puts the whole weight on your records.

The bases that work describe something measurable. Floor area works for rent, electricity and building depreciation where a room is used as a workspace. Hours of use works for a shared connection or machine. Separation works best and costs almost nothing: a second connection, a second meter or a handset used only for the business removes the apportionment question rather than answering it.

The bases that fail are the round ones. Fifty percent, chosen because it feels defensible, is the most commonly substituted figure in assessment precisely because it carries no method. A sixty five percent claim supported by a floor plan and a written note survives better than a fifty percent claim supported by nothing.

A further trap sits inside section 30 for owner-occupiers. You cannot pay yourself rent, because section 30 allows rent where premises are occupied as a tenant. An owner can still claim the business proportion of current repairs, municipal taxes and insurance under section 30, and depreciation on the business-used part under section 32, each restricted by section 38(2). Inventing a rent to yourself creates a disallowance out of nothing.

Three rules that disallow expenses which are entirely genuine

Section 40A(3) is stricter than its reputation. It disallows the entire payment rather than the excess, and aggregates payments to the same person on the same day, so splitting an invoice into four cash instalments achieves nothing. Rule 6DD carves out a defined list, none of which describes an ordinary trading business in a city with a bank branch. The threshold has stood at ten thousand rupees since it was halved from twenty thousand with effect from the assessment year beginning in 2018, and it is per person per day, not per invoice.

The withholding rule matters less to most individual traders than they fear, and more than they expect once they grow. An individual or Hindu undivided family falls within section 194J only where turnover from business exceeded one crore rupees, or gross receipts from a profession exceeded fifty lakh rupees, in the preceding financial year. Below that there is no obligation and no disallowance. Above it, a fee paid without deducting costs thirty percent of itself until the tax is paid. Last year's turnover sets the obligation, so it arrives a year before anybody looks for it.

Two statutes are live at once, and four numbers changed meaning

Everything above is stated under the Income-tax Act 1961, the correct authority for the return most traders are filing right now, covering the year that ended in March 2026. It is not the authority for the expenses being incurred today.

The Income-tax Act 2025 came into force on 1 April 2026 and governs tax year 2026-27 onward. It replaces eight hundred and nineteen sections with five hundred and thirty six, and replaces the previous-year and assessment-year pairing with a single tax year. The renumbering is not cosmetic here, because the numbers did not merely shift. Several were reassigned to different subject matter while remaining in use.

Read the first and ninth rows together. Under the 1961 Act, section 37 allows a general deduction. Under the 2025 Act, section 37 defers deductions to the year of actual payment. The number survived and changed sides. Section 32 was depreciation and is now the home of the STT deduction. Section 36 held the STT deduction and now holds the cash-payment disallowance. Section 38 restricted mixed-use assets and now deals with sums deemed to be profits. Four numbers appearing in every article written on this subject are still valid, still in the business chapter, and no longer mean what those articles say they mean.

The substance, checked limb by limb, survived the rewrite. The wholly-and-exclusively test carries into section 34 in the same words, with the capital and personal exclusions intact. Depreciation keeps the block of assets, the written down value method, the half-year restriction under one hundred and eighty days, and the forty percent computer rate. The cash threshold stays at ten thousand rupees per person per day. That continuity is worth stating, because a page that has not checked is relying on an assumption, and an assumption looks identical to a verification from outside.

Two cautions on reading across. The default individual regime does not disturb ordinary business deductions: normal depreciation and ordinary expenditure continue, and only the additional first-year depreciation on qualifying new plant is forgone. And restrictions elsewhere do not travel between heads. Interest against dividend income was capped and has since been removed altogether, but that sits under income from other sources.

The documentation standard, from weakest to strongest

Almost nothing here is decided by law at the point it is questioned. It is decided by what you can produce. A deduction is not a claim you assert, it is a claim you can rebuild, and the gap between the two is where genuine expenses are lost.

The rung most traders stop at is the second. An invoice and a bank debit prove something was bought and paid for. They say nothing about how much of it was the business, which is the only question a mixed expense is ever asked. The third and fourth rungs cost almost nothing to build during the year and cannot be built afterwards, because a usage record made in answer to a query is not contemporaneous.

Where this goes wrong in practice

Deducting hardware in full. The error that compounds: the asset never enters a block, the block never reconciles, and every later year's depreciation is wrong because of one year's claim.

Claiming a whole shared cost. Claiming all of a connection that serves a household as well as a desk invites an apportionment chosen by somebody else, invariably less generous than the one you could have evidenced.

Treating the cost stack as turnover. Brokerage, STT, goods and services tax, stamp duty and exchange charges are expenses. Folding them into turnover inflates the figure that decides audit applicability and gains nothing, a point set out with the full arithmetic in the guide on what a trade actually costs.

Citing a section number without its Act. No longer a stylistic point. Section 37 means two different things depending on which statute you are in, and both are current.

What the deduction is actually for

A deduction does not make a cost cheaper. It reduces the tax on a profit the cost has already reduced. At a thirty percent marginal rate a twenty four thousand rupee subscription still costs close to seventeen thousand after relief. Nothing here turns a cost into a benefit, and anything bought because it is deductible was bought for the wrong reason.

What the rules provide is an accurate picture of what the activity cost to run, available only to someone who was keeping it during the year. The apportionment basis, the asset register, the payment mode, the name on the invoice: each is a decision made at the moment of spending and merely reported at filing. A trader reconstructing a year of expenses in July is not computing a deduction, they are estimating one, and an estimate is precisely what an assessing officer may replace with their own.