Inventory Valuation Methods Explained explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Inventory valuation affects your cost of goods sold and profit. Here are the main methods used by Indian businesses.
Common methods
- FIFO (First-In, First-Out) — oldest stock sold first
- Weighted Average — average cost across units
- FIFO and weighted average are permitted; LIFO is not allowed under Indian standards
Valuation rule
Inventory is valued at the lower of cost or net realisable value (NRV).
Why it matters
- Affects COGS, profit and tax
- Consistency in method is required year to year
Frequently Asked Questions
What inventory valuation methods are allowed in India?
FIFO and weighted average; LIFO is not permitted.
How is inventory valued?
At the lower of cost or net realisable value.
Does inventory valuation affect profit?
Yes — it affects COGS and hence profit and tax.
Can I change my valuation method each year?
No — the method must be applied consistently.
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