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Section 44 Income Tax Act 2025: Can Preliminary Expenses Be Deducted?

Section 44 of the Income-tax Act, 2025 permits specified business formation, expansion and new-unit expenses to be deducted over five successive tax years, subject to eligibility, a statutory ceiling and compliance conditions.

Current law: The Income-tax Act, 2025 came into force on 1 April 2026. This guide addresses section 44 as reflected in the Act amended by the Finance Act, 2026. Section 35D of the Income-tax Act, 1961 is the broadly corresponding earlier provision.

Who can claim a deduction under Section 44?

Under section 44(1), an Indian company or a resident person other than a company may claim a deduction for expenditure of the types specified in section 44(2). The expenditure must be incurred either before the business commences, or after commencement in connection with extending an undertaking or setting up a new unit. The deduction starts in the tax year in which the business commences, the extension is completed, or the new unit begins production or operations, as applicable.

Which preliminary expenses qualify?

Section 44(2) specifies the following categories; a general business expense does not qualify merely because it was incurred before operations began.

  • Preparing a feasibility report or project report.
  • Conducting a market survey or another survey necessary for the business.
  • Engineering services connected with the business.
  • Legal charges for drafting agreements related to setting up or conducting the business.
  • For companies additionally: legal charges for drafting and printing the memorandum and articles of association; company registration fees; and specified public share or debenture issue expenses, including underwriting commission, brokerage and prospectus preparation or advertising costs.
  • Other prescribed expenditure not eligible for a deduction or allowance under another provision.

How much can be deducted and for how long?

Section 44(1) spreads the qualifying amount into five equal annual deductions of one-fifth each. Section 44(4) limits the aggregate expenditure eligible for amortisation to 5% of the cost of the project, or, at the option of an Indian company, 5% of the capital employed in its business. The 5% ceiling applies to the expenditure base, not separately to each year's deduction.

Calculation: Eligible base = lower of qualifying expenditure and the applicable 5% ceiling. Annual deduction = eligible base divided by five.

Important definitions under Section 44(5)

Cost of the project: The actual cost of relevant fixed assets, including land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings, including development expenditure on land and buildings. The measurement date is the last day of the tax year of business commencement or of completion of the extension or commencement of the new unit, as applicable. For expansion or a new unit, only relevant assets acquired or developed for that purpose count.
Capital employed in the business of the company: The aggregate of issued share capital, debentures and long-term borrowings at the relevant statutory measurement date; for expansion or a new unit, the calculation is confined to amounts issued or obtained for that project.
Long-term borrowings: Certain borrowings from government, specified financial institutions or banking institutions; and qualifying foreign borrowings or debts incurred to purchase capital plant and machinery outside India where the tenure is at least seven years. The precise statutory lender and eligibility conditions must be checked.

What records and audit reports are required?

Under section 44(3), particulars of expenditure on feasibility reports, project reports, surveys and engineering services must be furnished in the prescribed form and manner. Under section 44(6), an assessee other than a company or co-operative society must have the relevant accounts audited by an accountant before the specified date referred to in section 63 and furnish the prescribed audit report for the first tax year of the claim by the required date. Supporting invoices, project records, commencement evidence and cost calculations should be retained.

What happens on amalgamation or demerger?

Section 44(7) provides continuity where a qualifying undertaking of an Indian company is transferred to another Indian company in an amalgamation before the five-year period expires: the amalgamating company does not claim the deduction for the amalgamation year, and the amalgamated company continues under the statutory conditions. Section 44(8) similarly addresses a qualifying demerger: the demerged company does not claim for the demerger year, and the resulting company continues the remaining entitlement.

No double deduction: Section 44(9) prohibits claiming expenditure already deducted under this section again under another provision for the same or another tax year.

Illustration: How is the deduction calculated?

Assume an Indian company incurs qualifying preliminary expenditure of Rs. 12,00,000 and its project cost is Rs. 1,60,00,000. If it uses the project-cost basis, the 5% ceiling is Rs. 8,00,000. The eligible base is therefore Rs. 8,00,000 and the deduction is Rs. 1,60,000 per tax year for five successive tax years, subject to the remaining statutory conditions. If the company elects the capital-employed basis, the ceiling must be recalculated using qualifying capital employed.

Frequently asked questions

Can all startup costs be deducted under Section 44?

No. Only the categories specified in section 44(2), or otherwise prescribed under that provision, qualify, subject to the other statutory requirements.

Is the 5% limit an annual deduction?

No. It limits the qualifying expenditure base. One-fifth of that eligible base is deductible in each of five successive tax years.

Can a resident sole proprietor claim the deduction?

Potentially yes, if the expenditure and other conditions are met. The audit and first-year report requirements in section 44(6) are especially relevant.

What was the equivalent provision under the 1961 Act?

Section 35D dealt with amortisation of certain preliminary expenses. For historical tax years, the applicable law and transitional provisions should be considered separately.

Official legal sources

Income-tax Act, 2025 (official PDF)Income Tax Department: Act and Rules

Last reviewed: 10 November 2026. This article provides general legal information; the enacted text and applicable rules govern individual claims.