Introduction
Are you looking to understand about Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme Section 35DDA of Income Tax Act 1961 ?
This detailed article will tell you all about Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme Section 35DDA of Income Tax Act 1961.
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As a taxpayer, understanding the different sections of the Income Tax Act 1961 is crucial. One such section is 35DDA, which deals with the amortisation of expenditure incurred under a voluntary retirement scheme (VRS). In this blog, we will explore what this section entails and how it affects taxpayers.
What is Section 35DDA of the Income Tax Act 1961?
Section 35DDA was introduced in the Finance Act 2003 and applies to companies that have incurred expenditure on VRS. This section allows companies to amortise the expenditure incurred over a period of five years, starting from the year in which the expenditure was incurred.
How does Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme Section 35DDA Work?
The expenditure incurred on VRS can be claimed as a deduction in the year in which it was incurred. However, instead of claiming the entire amount as a deduction in the year of expenditure, companies can choose to amortise it over a period of five years.
For example, let’s say a company incurs Rs. 1,00,000 as expenditure on VRS in the financial year 2022-23. The company can choose to claim the entire amount as a deduction in the same year or amortise it over the next five years. If the company chooses to amortise it, they can claim Rs. 20,000 as a deduction each year for the next five years.
Who can Claim Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme Section 35DDA?
Section 35DDA is applicable to companies that have incurred expenditure on VRS. However, it is important to note that this section is only applicable to companies and not to individuals.
What is Voluntary Retirement Scheme (VRS)?
Voluntary Retirement Scheme (VRS) is a scheme introduced by companies to encourage employees to voluntarily retire from their services. Under this scheme, eligible employees are offered a lump-sum amount as an incentive to retire.
What are the Benefits of Amortisation of Expenditure Incurred Under Voluntary Retirement Scheme Section 35DDA?
The benefits of amortisation of expenditure incurred under voluntary retirement scheme section 35DDA are:
Reduced tax liability: By amortising the expenditure over five years, companies can reduce their tax liability in the year of expenditure.
Cash flow management: By spreading the expenditure over a period of five years, companies can manage their cash flow better.
Compliance: By following the provisions of Section 35DDA, companies can ensure compliance with the Income Tax Act 1961.
FAQs
Is Section 35DDA applicable to individuals? No, Section 35DDA is only applicable to companies that have incurred expenditure on VRS.
Can companies claim the entire expenditure incurred on VRS as a deduction in the year of expenditure? Yes, companies can claim the entire expenditure incurred on VRS as a deduction in the year of expenditure or amortise it over a period of five years.
What is the benefit of amortising the expenditure incurred under VRS? Amortising the expenditure over a period of five years can help companies reduce their tax liability, manage their cash flow better, and ensure compliance with the Income Tax Act 1961.
Conclusion
In conclusion, Section
35DDA of the Income Tax Act 1961 allows companies to amortise the expenditure incurred on VRS over a period of five years. This provides various benefits to companies, including reduced tax liability, cash flow management, and compliance with the Income Tax Act 1961. It is important for companies to understand the provisions of this section and utilise them to their advantage.
As a taxpayer, it is crucial to stay updated on the various sections of the Income Tax Act 1961 and understand how they affect you. By consulting with a tax professional or referring to official government resources, you can ensure that you are following the provisions of the law and maximising your tax benefits.
Amortisation of expenditure incurred under voluntary retirement scheme section 35DDA of Income Tax Act 1961 is an important provision that can benefit companies that have incurred expenditure on VRS. By spreading the expenditure over a period of five years, companies can reduce their tax liability, manage their cash flow better, and ensure compliance with the Income Tax Act 1961.
Section 35DDA, of Income Tax Act, 1961
Section 35DDA, of Income Tax Act, 1961 states that
(1) Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.
(2) Where the assessee, being an Indian company, is entitled to the deduction under sub-section (1) and the undertaking of such Indian company entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in that sub-section, to another Indian company in a scheme of amalgamation, the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place.
(3) Where the undertaking of an Indian company entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in that sub-section, to another company in a scheme of demerger, the provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place.
(4) Where there has been reorganisation of business, whereby a firm is succeeded by a company fulfilling the conditions laid down in clause (xiii) of section 47 or a proprietary concern is succeeded by a company fulfilling the conditions laid down in clause (xiv) of section 47, the provisions of this section shall, as far as may be, apply to the successor company, as they would have applied to the firm or the proprietary concern, if reorganisation of business had not taken place.
(4A) Where there has been reorganisation of business, whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47, the provisions of this section shall, as far as may be, apply to the successor limited liability partnership, as they would have applied to the said company, if reorganisation of business had not taken place.
(5) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) in the case of the amalgamating company referred to in sub-section (2), in the case of demerged company referred to in sub-section (3), in the case of a firm or proprietary concern referred to in sub-section (4) and in the case of a company referred to in sub-section (4A) of this section, for the previous year in which amalgamation, demerger or succession, as the case may be, takes place.
(6) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.