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Section 37 of The Income Tax Act
Over the past few years, especially since 2020, the employer-employee insurance scheme has gained traction. The impact of the COVID-19 pandemic created a realisation of the increasing health protection gap in India. To mitigate this gap, the government of India mandated businesses with more than 20 employees to provide health insurance coverage through employer-employee insurance schemes. This initiative fosters a culture of well-being at the workplace, while also ensuring a resilient workforce at task.
To incentivise businesses complying with this group health insurance mandate, the government also provides tax reliefs under section 37 of the Income Tax Act. This provision allows businesses to claim tax deductions for business-related expenses, including the cost of E-E insurance. Not only does this provide an opportunity for businesses to save tax, but it also encourages them to take an active participation in the well-being of their employees.
Now we know how tedious the tax filing process can be, particularly for small business owners. This blog aims to decode section 37 of the Income Tax Act which also includes tax breaks for various business expenses including group health insurance. Learn all about the key provisions, deductions, and practical tips to leverage the deductions available under this tax break.
What Is Employer-Employee Insurance?
For the uninitiated, employer-employee insurance (E-E insurance or group health insurance) is a type of group policy that covers the healthcare costs of a specific group, in this case, a group of employees.
A group health insurance covers costs related to hospitalisation, pre and post-hospitalisation, maternity care, critical illness, and more. This type of policy is purchased by the employer and used by the employees and occasionally their family members. There is no waiting period in group health insurance, which means that the policy benefits and coverage can be availed from day one.
In addition to providing health coverage to employees, Employee-Employer insurance also offers various benefits to your business. From enhancing employee engagement to improving productivity at work, a holistic group health policy plays a pivotal role in bettering business outcomes.
Also Read: 10 Reasons Why Companies Should Offer Health Insurance To Employees
What Is Section 37 of The Income Tax Act?
Under the general provision of section 37, expenses incurred by a business for professional or trade specific purposes can be claimed for deductions. It reduces the tax burden of the business owner by reducing their overall taxable income.
Deductions for a variety of operational expenses can be claimed as long as these expenses are deemed “wholly and exclusively” related to the business.
For example – salaries, legal fees, interest on loans, and perquisites like insurance premiums are costs that are directly related or critical to the functioning of a business and are therefore included under section 37.
Suggested read: Section 80D of Income Tax Act
Conditions For Deductions Allowed Under Section 37
- Should not be a personal or capital expenditure
- Should not be in the purview of deductions under sections 30 to 36 of the Income Tax Act
- Should not be an expense for an activity that is legally prohibited or considered an offence
- Should be incurred purposefully for profession or trade
- Must be paid for or accrued in the previous financial year
Difference Between Section 37 and Section 37(1) of The Income Tax Act
Understanding Section 37(1) of The Income Tax Act
Section 37(1) is an extension of the aforementioned section 37 and businesses should also consider the guidelines specified under section 37(1). It specifies the activities that are prohibited by law and are deemed as offences and certain CSR expenses that cannot be applicable for deductions under section 37. They are as follows:
- Bribes
- Protection Money
- Donations (that are considered illegal or go against public policy)
- Freebies
- Expenditures on CSR activities under section 135 of the 2013 Company Act
The main difference between section 37 and section 37(1) lies in the latter’s emphasis on the exclusion of unlawful expenses that are prohibited by law.
While section 37 covers the broader range of business expenses, section 37(1) specifies certain categories of expenses that are disqualified from deductions.
Also read: Employee Benefit Expenses
Deductions Allowed Under Section 37
1. Advertisement Expenses
2. Legal Expenses
3. Interest on Loan(s)
4. Salaries For Employees
5. Penalty Payments
6. Expenditure For Raising Loans
Following are the additional expenses that are liable for deduction under Section 37:
- Fees to registrar of companies (with certain exceptions, exceptions are listed below)
- Employee’s welfare expenses
- Business specific costs incurred during festivals like Diwali, Christmas, etc.
- Bonuses and gifts to employees (however, they must not be a part of perquisites)
- Telephone connection expenses
- Professional fees
Expenses Disallowed as Deduction Under Section 37(1) from Business Income
- Fees paid to the Registrar of Companies for changing the company’s Memorandum and Articles of Association.
- Fee paid to the Registrar of Companies for increasing the authorised capital of a company.
- Expenditure incurred by an assessee to gain vacant possession of the land they own
- Guarantee commission paid to the bank for securing a loan for acquiring a fixed asset for business
- Payment made for obtaining tenancy rights over a property
- Penalty paid for violating any law or regulation
- Expenditure incurred by a company for shifting its registered office
- Expenditure incurred for demolishing a building to construct a hotel on the same site
- Interest paid for non-payment, less payment, delayed payment, or deferment of advance tax
Deduction For Employer-Employee Insurance Under Section 37
Section 37 allows businesses to claim deductions for expenses related to E-E insurance. Since health insurance premiums are paid by the employer, they are considered part of the company’s operational costs and are treated as deductible expenses.
This means that businesses can reduce their tax liability by removing the cost of premiums from their total taxable income. By offering health insurance benefits to employees, businesses not only meet their legal obligations but also make the most of tax-saving opportunities.
Related Read: How Group Health Insurance Premiums Are Calculated?
How to Claim Tax Deductions under Section 37 of the Income Tax Act?
We have listed down 5 simple steps with which businesses can easily claim tax deductions under section 37.
1. Identify Eligible Expenses
To claim deduction, you will first have to identify all the expenses, including group health insurance, that are allowed under section 37
2. Ensure Proper Documentation
A thorough record keeping of all relevant expenses that includes invoices, receipts, and policy documents for E-E insurance will make the process of tax filing hassle-free. So ensure all your documents are in order.
3. Fill Out the Appropriate ITR Form
4. Ensure Proper Accounting
You can either file your tax returns yourself or take professional assistance. However, it is imperative you include expenses in the relevant section of the return to ensure they are deducted from your overall taxable income.
5. Consult a Tax Professional
If you are filing taxes for your company then you should consider consulting with a tax professional to ensure you have the right accounting and your deductibles are incorporated for maximum outcomes.
Quick read: Group Health Insurance Tax Benefits
Practical Tips for Employers to Utilise Section 37
1. Choose Insurance Policies That Qualify
Partner with the right insurance provider and make sure to select a health insurance policy that is directly related to the welfare of employees, these policies can be – medical, life, and accidental insurance.
2. Maintain Compliance with Tax Regulations
3. Leverage Tax Consultants for Accurate Filing
A tax consultant can help ensure that your deductions are correctly calculated and that you are maximizing your savings under Section 37.
Related read: Top 5 Group Health Insurance Companies in India
Get Group Health Benefits From Onsurity For Better Financial Planning
Tax filing can be quite cumbersome, particularly if you’re a small business owner and/or you file taxes yourself. This is where partnering with the right insurance provider comes in handy. With Onsurity, you can seamlessly manage onboarding, claims, and payroll. Additionally, Onsurity health and wellness benefits are customisable and affordable for businesses of all sizes.
Let’s break down how Onsurity’s affordable healthcare plans can add value to your business and how they can impact your tax deductions under section 37. A monthly subscription to Onsurity will cost you Rs. 145 per employee,
so, let’s analyse this for a team size of 50 employees:
- Monthly Investment: ₹7,250 (50 × ₹145)
- Annual Investment: ₹87,000
- Tax Saving at 30%(tax slabs may vary): ₹26,100
- Effective Annual Cost: ₹60,900
Net Cost Calculation:
- Original Cost: ₹145 per employee
- Tax Saving: ₹43.5 (30% of ₹145)
- Effective Cost: ₹101.5 per employee
*The tax percentage may vary based on the turnover of the company and the plan composition. We advise you to consult a tax professional at the time of ITR filing to maximise tax reliefs and returns.
If you want to understand how Onsurity health and wellness benefits will create value for your business, connect with our team today. Get a quote instantly and protect your team with the most comprehensive health membership.
FAQs:
1. What is section 37 of the Income Tax Act?
Section 37 reduces the tax burden of businesses by reducing their overall taxable income. Various expenses, including group health insurance premiums, incurred by businesses for professional or trade purposes can be claimed for deduction under section 37.
2. What type of expenses are allowed under section 37?
Business expenses for – advertisement, legal fees, interest on loans, salaries paid to employees, penalties, and expenses for raising loans that bear a direct impact on the functioning of the business can be claimed under section 37.
3. Are salary and wage payments deductible under section 37?
Yes, salaries and wages paid to employees and professionals are business expenses and are therefore deductible under section 37. However, payment made to another business can not be claimed under section 37.
4. Is there a limit to deductions claimed under section 37?
Under section 37, there is no monetary limit. However, there are various limitations on expenses that are not allowed under section 37.
5.Can expenditure for CSR (Corporate Social Responsibility) be claimed under Section 37?
CSR activities are often viewed as voluntary actions by businesses done for societal good and don’t bear a direct impact on business operations and thus are not allowed for deductions under section 37.
6. What documentation is required to claim deductions under Section 37?
Here are some of the documents that you should have in handy while claiming deductions under section 37: invoices and receipts; proof of business purpose; insurance policy documents for E-E insurance; bank statements; third-party contracts; salary and wage record; tax invoices and GST documents.
7. How can employers ensure compliance with Section 37 provisions?
Employers should maintain proper documentation, avoid double deductions, and ensure expenses are wholly and exclusively for business purposes to ensure compliance with section 37 provisions.