Section 35D Preliminary Expenses Under ITA 2025: 5-Year Amortisation for Companies

Section 35D Preliminary Expenses 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.

1. What Are Preliminary Expenses?

When a new company or business is incorporated and set up, various expenses are incurred before the commencement of business -- legal fees for drafting MOA/AOA, registration charges, stamp duties on share capital, costs of printing prospectus and application forms, professional advisory fees for setting up the business, and other formation expenses. These are called preliminary expenses. Since the business has not yet commenced, these cannot be charged to the P&L in the year incurred. ITA 2025 provides a structured 5-year amortisation of these expenses through Section 35D.

2. Section 35D: Eligible Expenses

Section 35D of ITA 2025 covers preliminary expenses incurred before commencement of business (or after commencement, in connection with extension of undertaking or setting up a new unit):

• Preparation of feasibility report
• Preparation of project report
• Conducting market survey
• Engineering services
• Legal charges for drafting agreements, MOA, AOA
• Printing charges for prospectus and application forms
• Registration and filing fees with Registrar of Companies
• Underwriting commission on issue of shares/debentures

3. Qualifying Limit for Section 35D

Section 35D does not allow the full preliminary expense to be deducted -- it is subject to a cap:

• For Indian companies: lower of 5% of project cost OR 5% of capital employed (whichever is higher)
• For others (non-companies): 5% of project cost
• This cap prevents inflated preliminary expenses from reducing taxable income artificially
• Expenses exceeding the cap are not deductible at all

4. 5-Year Amortisation

The eligible preliminary expenses are deducted in equal instalments over 5 consecutive years, beginning from the year in which the business commences or the extension begins:

• Each year: 1/5th (20%) of total eligible preliminary expenses
• If the business is unable to fully deduct in any year (due to insufficient profits), the deduction is not carried forward -- it is simply lost for that year
• No interest benefit: the time value of spreading over 5 years is a cost compared to immediate deduction

5. Section 35DDA: VRS Payments

Section 35DDA provides similar 5-year amortisation for payments made under Voluntary Retirement Scheme (VRS):

• When a company pays VRS compensation to employees, the payment is deductible over 5 years (1/5th per year)
• If the payment is in the current year, only 1/5th is deductible this year
• Remaining 4/5th is deductible in equal instalments over the next 4 years
• This prevents large VRS payments from creating artificial losses in a single year
• Different from Section 35D (which covers formation expenses) -- Section 35DDA is for ongoing employee rationalisation costs

6. Section 35E: Mineral Development Expenses

Section 35E covers expenditure on development of a mine or mineral deposit:

• Applicable to companies engaged in mining business
• Expenditure on development activities (drilling, boring, shaft sinking) deductible over the period of deposit depletion
• Deduction spread over the expected life of the mine
• Must be kept separate from exploration expenses (which may be deductible differently)

7. Why These Provisions Matter

Sections 35D, 35DDA, and 35E are important for:

• Startup companies that incur significant preliminary expenses
• Companies undertaking major business expansions (extension of undertaking)
• Manufacturing companies setting up new plants
• Companies with mass retrenchment under VRS
• Mining and natural resource extraction companies

For companies under Section 115BAA (22%), these amortised deductions are available (unlike deductions under specific exemption sections). Section 115BAA prohibits deductions under specified sections but Section 35D/35E are eligible deductions under the scheme.

8. Documentation Required

To claim Section 35D deduction:

• List of all preliminary expenses with supporting invoices
• Computation showing eligible expenses within the 5% cap
• Year-wise amortisation schedule (showing which year is being claimed)
• Proof of commencement of business (first sale invoice, production record, service delivery proof)
• Auditor certificate confirming the nature and amount of preliminary expenses

9. Treatment in Income Tax Return

Section 35D deductions are claimed in the P&L computation under "Deductions under Section 35D" in Schedule BP (Business and Profession) of the ITR. The unamortised balance of preliminary expenses is shown as an asset in the balance sheet (as a deferred revenue expenditure) until fully written off.

10. Why TaxClue

Preliminary expense amortisation -- identifying eligible expenses, computing the 5% cap, and tracking the 5-year schedule -- requires careful planning from the inception of the business. TaxClue advises startups and expanding businesses on Section 35D compliance. Contact us under ITA 2025.

Getting Section 35D Preliminary Expenses right the first time saves both time and money. Many businesses seek expert help for Section 35D Preliminary Expenses to stay fully compliant. The rules around Section 35D Preliminary Expenses are updated from time to time, so stay informed.