Section 35D of Income Tax Act: Amortisation of Certain Preliminary Expenses

What does amortisation of preliminary expenses mean?

Preliminary expenses are specified costs connected with starting a business, extending an undertaking, or setting up a new unit. Instead of allowing the whole qualifying amount as a deduction in one year, the law permits the admissible amount to be written off in equal instalments over the prescribed period.

Under Section 35D, expenditure incurred after 31 March 1998 is generally deductible at one-fifth of the eligible amount for each of five successive previous years, beginning with the year in which the business commences, the extension is completed, or the new unit starts production or operation, as applicable.

Who can claim the deduction?

Which preliminary expenses qualify?

Section 35D identifies specific categories. Broadly, these include:

• preparation of a feasibility report or project report;
• market survey or another survey necessary for the business;
• engineering services relating to the business;
• legal charges for drafting agreements connected with setting up or conducting the business;
• for a company, specified expenditure relating to its constitutional documents, registration and a public issue of shares or debentures; and
• other prescribed expenditure that is not otherwise eligible for allowance or deduction under another provision.

How much deduction is allowed?

For expenditure incurred after 31 March 1998, the admissible qualifying expenditure is spread over five successive previous years.

The aggregate qualifying expenditure is generally capped at 5% of the cost of the project. An Indian company may, where the provision permits, use 5% of capital employed in the business instead. Any excess over the applicable statutory ceiling is ignored for computing the deduction.

Meaning of cost of the project

For Section 35D purposes, the expression broadly refers to the actual cost of specified fixed assets shown in the books at the relevant year-end, with the precise measurement depending on whether the expenditure relates to commencement of business or to an extension or new unit.

Meaning of capital employed

For an Indian company, capital employed broadly takes into account issued share capital, debentures and qualifying long-term borrowings at the relevant year-end, subject to the detailed statutory definition.

Form 3AF and audit requirements

Form 3AF

Rule 6ABBB and Form 3AF were introduced for the statement of specified preliminary expenses. The change applies from 1 April 2024. Taxpayers claiming relevant expenditure should verify the applicable form, filing method and due date for the tax year concerned.

Audit condition under the 1961 Act

Section 35D(4) contains an additional audit condition for a person other than a company or co-operative society. Where applicable, the accounts for the year or years in which the specified expenditure is incurred must be audited and the prescribed audit report furnished in accordance with the provision and rules.

No double deduction

Where expenditure is claimed and allowed under Section 35D, the same expenditure cannot also be claimed as a deduction under another provision of the 1961 Act for the same or another assessment year.

Section 35D after 1 April 2026: transition to Section 44

The Income-tax Act, 2025 came into force on 1 April 2026 and repealed the Income-tax Act, 1961, subject to detailed savings. The corresponding provision for amortisation of certain preliminary expenses is Section 44 of the 2025 Act.

Section 44 continues the core five-year approach: one-fifth of qualifying preliminary expenditure is allowed for each of five successive tax years, subject to its conditions. For claims that began under Section 35D before repeal, the official transition guidance states that eligible multi-year deductions continue for the remaining years under the new Act, subject to the applicable conditions and Section 536 savings.

Amalgamation and demerger under legacy Section 35D

The legacy provision contains continuity rules where an eligible undertaking is transferred in a qualifying amalgamation or demerger. Broadly, the transferor does not claim the deduction for the year of transfer and the successor may receive the remaining treatment as provided by the section. For post-1 April 2026 treatment, the savings and corresponding provisions of the 2025 Act should also be checked.