Companies that incur expenses on in-house research and development (R&D) activities can claim tax deductions under the Income Tax Act, 1961. The key provision that facilitates this is Section 35(2AB).

What Does Section 35(2AB) Offer?

• Weighted Deduction:
  Eligible in-house R&D expenditure can be claimed at a weighted deduction (commonly 150% of the actual expenditure), effectively reducing taxable income by more than the amount spent.

• Eligibility Requirements:

  • The R&D work must be undertaken in-house and should relate to projects that are approved or fall under the specified categories in the Act.

  • The expenditure must be incurred wholly and exclusively for research and development purposes.

  • Proper documentation and record-keeping are essential to substantiate the claim.

How to Claim the Deduction

1. Maintain Accurate Records:

   • Keep detailed accounts and receipts of all expenses related to R&D activities.

   • Ensure that the expenses are segregated clearly in your books of accounts.

2. Meet the Conditions:

   • Verify that your R&D projects qualify under Section 35(2AB) by confirming they are in areas eligible for weighted deduction.

   • Ensure that all conditions laid down in the Act for claiming this deduction are satisfied.

3. Report in Your Tax Return:

   • When filing your income tax return, include the R&D expenditure under the appropriate section.

   • The weighted deduction (e.g., 150% of the actual expenditure) will then be applied, reducing your overall taxable income.

Example Illustration

Imagine your company spends ₹10 lakh on qualifying in-house R&D activities. With a weighted deduction of 150%, you can claim a deduction of:

• Deduction Amount: ₹10 lakh x 150% = ₹15 lakh

This additional deduction effectively reduces your taxable income, offering a significant tax benefit.

Key Takeaway

By claiming a weighted deduction for in-house R&D expenses under Section 35(2AB), companies not only support innovation and growth but also optimize their tax liabilities. Ensure you comply with all documentation and eligibility requirements to make the most of this deduction.

Yes, the Income Tax Act, 1961 provides a deduction for capital expenditure incurred on scientific research under Section 35. This deduction is available to assessees engaged in business or profession who invest in scientific research.

Key Provisions of Section 35:

1. 100% Deduction for Own Research Activities

   • If the capital expenditure is incurred by the assessee for in-house scientific research, a 100% deduction is allowed in the year in which the expenditure is incurred.

   • This benefit is available even if the research project is unsuccessful.

2. Capital vs. Revenue Expenditure

   • Revenue expenditure on scientific research is also fully deductible under this section.

   • Capital expenditure (excluding land & buildings) can be claimed as a deduction.

3. Donation to Research Associations

   • If the expenditure is made in the form of a contribution to an approved scientific research association, university, or institution, enhanced deduction of 100% or 150% (as per eligibility) is available.

   • The institution must be approved by the Income Tax Department under Section 35(1)(ii) or (iii).

4. Important Conditions to Avail Deduction

   • The scientific research should be related to the assessee’s business.

   • The deduction is not available for capital expenditure on land.

   • The research facility should be recognized by the prescribed authority.

Conclusion

Section 35 provides a strong incentive for businesses to invest in scientific research. Whether the research is done in-house or through an approved institution, businesses can significantly reduce their taxable income by claiming the deduction for eligible expenses.

When it comes to claiming deductions for scientific research expenses, the answer really depends on how those expenses relate to your income-earning activities.

Here’s the lowdown:

• If it’s Business-Related:
  When you’re running a business or are engaged in a profession and you spend money on scientific research to help improve or innovate your business, then—provided you can show that the expense was incurred “wholly and exclusively” for business—the expense may be deductible as a business expense. This is in line with general business expenditure provisions in the Income Tax Act.

• If it’s Personal:
  If you’re doing scientific research out of personal interest or for non-business reasons, unfortunately, that cost isn’t deductible. The tax law only allows deductions for expenses directly related to earning taxable income.

• Alternatively, Support Research Through Donations:
  Even if your own research isn’t deductible because it’s not tied to your business, you can still support scientific research by donating to approved research institutions. In that case, the donation itself may qualify for a deduction under the provisions for charitable contributions.

Bottom Line:
An individual can claim a deduction for scientific research expenses only if those expenses are directly linked to their business or professional activities. Personal research expenses are not deductible. However, if you donate to an approved research institution, you might enjoy a tax benefit for that contribution.

Terminal Depreciation is essentially the final depreciation deduction that a taxpayer can claim on a fixed asset in the year it is disposed of or written off. It helps ensure that the entire cost of the asset is eventually written off for tax purposes.

How It Works:

• Final Year Adjustment:
  When an asset is sold or otherwise disposed of before the end of its useful life, the usual depreciation calculation may leave a remaining balance (the written down value). Terminal depreciation is the pro-rata depreciation claimed in the year of disposal based on the number of days the asset was in use.

• Pro-Rata Calculation:
  In the disposal year, depreciation is calculated on a pro-rata basis. This means if the asset was used for part of the year, you claim a proportionate deduction for that period. This final adjustment is what we call terminal depreciation.

• Purpose:
  The idea is to fully account for the cost of the asset in your tax computations. Without terminal depreciation, there might be an unabsorbed cost remaining in the books when the asset is disposed of.

Key Point:

• Section 32 of the Income Tax Act, 1961 governs the depreciation of assets, including the pro-rata (or terminal) depreciation in the year of disposal. While “terminal depreciation” isn’t mentioned by name in the Act, the concept is inherent in the depreciation calculations applied when an asset is retired.