How to get deduction of preliminary expenses under Income Tax Act
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When a business is newly set up, it incurs various preliminary expenses before starting its operations. The Income Tax Act, 1961, allows a deduction for such expenses under Section 35D. What Are Preliminary Expenses? Preliminary expenses include costs incurred before the commencement of business, suRead more
When a business is newly set up, it incurs various preliminary expenses before starting its operations. The Income Tax Act, 1961, allows a deduction for such expenses under Section 35D.
What Are Preliminary Expenses?
Preliminary expenses include costs incurred before the commencement of business, such as:
✔️ Legal and professional fees for drafting the Memorandum & Articles of Association.
✔️ Registration fees paid to the Registrar of Companies.
✔️ Underwriting commission for share issue.
✔️ Cost of feasibility studies, market surveys, or reports.
How Is the Deduction Allowed?
📌 Eligibility: The deduction is available to Indian companies and resident non-corporate assessees.
📌 Amount of Deduction: 5% of the cost of the project OR capital employed, whichever is higher.
📌 Manner of Deduction: The allowed preliminary expenses are deductible in 5 equal annual installments starting from the year in which the business commences.
Example:
If a company incurs ₹10 lakh as eligible preliminary expenses, it can claim ₹2 lakh per year for 5 years.
Key Conditions to Remember
✔️ The expenses must be specifically mentioned under Section 35D to qualify for deduction.
See less✔️ Proper documentation and proof of expenditure are required.
✔️ If the business is not yet operational, the deduction will commence from the year in which it starts functioning