Tax Benefit for Special Reserve
As per section 36(1)(viii) of the Income Tax Act, 1961, the eligible entities are allowed to get a deduction on Special Reserve created under this section which results in the reduction of tax liability.
In some cases, contributions to certain reserves may be tax-deductible. This means that when a company sets aside funds for a special reserve, it can reduce its taxable income by the amount contributed to the reserve by claiming a deduction according to the Income Tax Act.
Deduction under this section is allowed for an amount not exceeding 20% of the profits derived from eligible business computed under the head profits and gains of business or profession to a specified entity before making any deduction under this clause, carried to a special reserve account created and maintained by such specified entity.
If in the future, any amount is withdrawn from such special reserve then it shall be deemed to be the profits of business or profession and shall be chargeable to income tax as the income of the previous year in which such amount is withdrawn.