No deduction is allowed for creating such reserves. But in case of financial corporations or, as the case may be, public company engaged in providing long-term finances for industrial and agricultural development in India and approved by the Central Government for the above mentioned purpose such deduction is allowed at the following rates :
(a) In respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding 20% [40% upto Assessment Year 2007-08] of the total income (computed before making any deduction under this clause) can be carried to such reserve account.
(b) In respect of special reserve created by a fênancial corporation which is engaged in providing long term industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the bussiness of providing long term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding 20% [40% upto Assessment Year 2007-08] of the profits derived from such business of providing long term finance (computed under the head Profits and Gains of Business or Profession before making any deduction under this section) can be carried to such reserve account.
Total income for this purpose means income computed before allowing this deduction.
For the above purpose ‘long term industrial finance’ means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment alongwith interest thereof during a period not less than 5 years.
With effect from assessment year 1-4-1982 the aggregate of amounts carried to such reserve should not exceed twice the amount of paid-up capital and general reserves.
With effect from 2010-11, National Housing Bank is also allowed deduction of an amount not exceeding 20% of the profits subject to creation of reserve.
Special Reserve Created by a Scheduled Bank (other than Foreign banks) [Section 36(1)(viiia)]
If such bank is engaged in banking operations outside India, will be entitled to a deduction, in computation of their taxable income, upto 20% of the total income carried, by them to special reserve account provided the scheduled bank is approved by the Government. The amendment has taken effect from 1st April 1983 i.e., assessment year 1983-84.