Deductions Allowed & Amounts Expressly Disallowed

Relevant Provision: Section 93 and Section 94

1. Section 93 — What CAN Be Deducted

2. Section 94 — What CANNOT Be Deducted

Personal expenses of the assessee; capital expenditure (only depreciation is allowed, not full capital cost); interest, salary, or payments outside India/to a non-resident without deduction of applicable TDS; notional expenses not actually incurred; expenditure in the nature of a penalty or for a purpose that is an offence or prohibited by law; and expenditure exceeding prescribed cash-payment limits.

3. Taxability Impact

A general "wholly and exclusively" test governs any expense not specifically listed under Section 93, giving it a residual deduction clause of its own — meaning the net taxable income under this head is gross receipts less only the deductions specifically permitted, not a blanket standard deduction as under House Property.

4. Illustrative Example

Ms. Rekha earns ₹1,00,000 interest from a company fixed deposit and pays her bank a collection commission of ₹1,000 to realise this interest. Under Section 93, she can deduct ₹1,000, making her taxable interest income ₹99,000. Separately, she also pays ₹8,000 in cash (in a single transaction) to a contractor for repairing let-out machinery — since this exceeds the prescribed cash-payment limit for that expense category, the deduction may be disallowed under Section 94 unless paid through a banking channel.

5. Case Laws

CIT v. Rajendra Prasad Moody (1978) SC — a landmark ruling holding that expenditure is deductible even if no income actually resulted in that year, so long as the expenditure was incurred for the purpose of earning such income.

CIT v. Dr. V.P. Gopinathan — dealt with deductibility of interest expense against interest income, clarifying the "nexus" test between expenditure and the specific income earned.

6. Precautions

Keep every deduction actual, substantiated, and revenue in nature.

For depreciation claims on let-out machinery, use the prescribed depreciation schedule/rates, not ad hoc write-offs.

Avoid cash payments above the prescribed limit for any deductible expense; use banking channels to preserve deductibility.

7. FAQs

Q1. Can I deduct interest paid on a loan taken to purchase shares, against dividend income?

Yes, subject to a cap — historically capped at 20% of the dividend income, to prevent excessive interest claims eroding the dividend tax base.

Q2. Can brokerage/demat charges be deducted against dividend or interest income?

Only if directly and specifically incurred for realising that income; routine account-maintenance charges not directly linked are generally not deductible.

Q3. Is TDS deducted at source itself an allowable expense?

No — TDS is a prepayment of the taxpayer's own tax liability and is claimed as a tax credit, not a deduction from income.

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