Section 35 D of Income Tax Act: The principal piece of legislation that controls how people, businesses, and other entities are taxed in India is the Income Tax Act, 1961. Certain expenses associated to starting or growing a business may be deductible under Section 35D of the Income Tax Act. We will go into great detail about Section 35D in this blog, including its purpose, requirements for qualifying, and potential deductions.
Section 35 D of Income Tax Act:-
Section 35D establishes payment reduction rules for particular upfront costs incurred by an Indian business or a resident who is preparing to launch a venture, establish a new industrial division, or seek to expand a business endeavour.
Starting from the previous year that saw the beginning of the firm, the deduction is paid against the gains secured by the Indian corporate body in ten equal installments spread out over ten years.
This deduction only applies to a certain group of expenses that were classified under specific headings on March 31, 1970. The project summary rehearsal and doing market research required to analyse the course of business are two of the few portions among the qualifying charges stated under this principle.
Section 35D of the Income Tax deductions
- A firm or an Indian person may claim tax deductions under Section 35D of the Income Tax Act for expenses incurred in advance of a specific activity.
- Maximum Amount Deductible Under Income Tax Section 35D
- The amount that may be deductible is governed by Section 35D of the Income Tax Act.
- The total project cost or capital used for the company’s operations should not exceed 5% of the maximum deductible amount.
The project’s cost
This covers the price of fixed assets like a factory, land, building, machines, furniture, and fixtures as well as development expenditures and additional setup costs spent after the firm had already started.
The expenses that were entered into the books on the last day of the previous year, when the company started operations, are the costs of a project.
Capital Used in the Business of the Company
Included in this are the capital investments that a company uses for its operations, such as share capital, debentures, long-term borrowings, and share premium accounts.
It is important to remember that the capital used in the company’s activity is the amount that was recorded on the last day of the previous year, when the business first began running.
Section 35D Tax Deductible Expenses
The following costs qualify for a Section 35D deduction: investment made in relation with
- 1. Creating a report on the viability.
- 2. Writing a report on a project.
- 3. Carrying out any other survey required for the assessee’s firm, such as a market study.
- 4. Engineering services connected to the assessee’s company
Deduction Amount
In accordance with Section 35D, the amount of the deduction may be taken either in the year that the firm first starts up or a future year. The following deduction is permitted:
In the year that the business starts operating, the full cost incurred for the creation of a feasibility report or project report is deducted from income.
The cost required to acquire intellectual property, patents, copyrights, trademarks, licences, franchises, or any other comparable rights may be deducted over the course of five equal annual payments beginning with the year the business begins operations.
In the year in which the asset is used for the business, the cost expended for the acquisition of land, a building, or any other asset used for the operation is allowable as a deduction.
The cost of hiring new employees and paying for their training is deductible in the year the business opens for business.
Conclusion
In conclusion, businesses have a valuable chance to write off costs associated with starting up or growing their activities according to Section 35D of the Income Tax Act. By utilising these deductions, companies can lower their tax obligations and put the money they save back into expanding and improving their operations.
To prevent any potential disagreements with the tax authorities, it is crucial to make sure that the eligibility requirements are met and that the right documentation is kept.
Eligibility requirements:-
The following prerequisites must be satisfied in order to claim a deduction under Section 35D:
- The cost must have been incurred with the intention of starting a new business or growing an existing one.
- The enterprise must be profitable.
- The cost cannot be one of a capital type.
- The expense has to be made either before the business started up or the year before the business started up.