Section 57 Deductions - Income Tax Act

Deductions are allowed against income subject to tax under the heading "Income from other sources" under Section 57 of the Income Tax Act. We shall delve into the numerous deductions permitted under Section 57 and examine its nuances in this article.

Allowable Deductions As per Section 57

Section 57 permits the following deductions:

• Interest or Dividends on Financial Assets That Can Be Traded (Securities)

  Deduction is permitted for any reasonable amount paid as commission or compensation to a banker or other third party for collection costs incurred in order to realize such dividend or interest on the taxpayer's behalf.

• The employee's contribution to welfare schemes is deducted

  Contributions made by employees to employee state insurance (ESI), provident fund (PF), superannuation fund (SF), and other welfare programs are recorded in the employer's accounts and are considered income if they are not subject to tax under the heading "profits and gains of business or profession." If the employer contributes any money to these accounts and it is credited before or on the deadline, the taxpayer is able to deduct that amount.

• A deduction for expenses incurred related to rental income

  Any cost expended for ongoing maintenance of the aforementioned assets, as well as any insurance paid on them, is deductible when rental revenue is obtained from renting out plant, furniture, machinery, or buildings. These items include furniture, machinery, and plants that are subject to depreciation. But in the case of a building, depreciation will only be permitted if the taxpayer is the true owner of the asset.

• Typical Family Pension Deduction

  One-third of the income, or Rs 15,000, whichever is less, might be deducted in the case of a family pension.

• Reduction of Any Additional Earnings

  Any additional expense paid in order to generate money that falls under the category of "income from other sources" and is not a capital or personal expense. However, if the taxpayer is a foreign firm, this deduction is not allowed.

• Interest-Related Deduction on Compensation or Increased Compensation

  Subject to certain restrictions, 50% of interest on compensation or enhanced compensation paid may be deducted from income.

Modifications to ITA Section 57

The Finance Act of 2020 made changes to Section 57(i), which will take effect on April 1, 2021. In accordance with this, a taxpayer is eligible to deduct interest costs in order to get dividend income. Subject to a limit of 20% of dividends or income in relation to mutual fund units, interest on money borrowed for share investments may be deducted.

As an illustration

Assume that on April 15, 2021, a person gets a dividend of Rs 20,000 from a domestic corporation. When the dividend amount above Rs 5,000, the corporation will deduct tax at a rate of 10%. As a dividend, the individual will receive the remaining sum of Rs 18,000 (Rs 20,000 minus Rs 2,000)

Let's say that during the fiscal year, the person borrowed money to purchase equity shares and paid an interest payment of Rs 6,000. In accordance with the change to Section 57, the deduction is limited to twenty percent of the gross dividend. Only Rs 4,000 (20% of Rs 20,000) can be deducted for interest in this situation.

In summary

To sum up, the Income Tax Act's Section 57 offers a number of deductions against income that is subject to charges under the heading "Income from other sources." For precise tax planning and compliance, it is imperative to comprehend the nuances of these deductions.

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