Deduction for Expenditure on Scientific Research AY 2026-27

By | May 9, 2026
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Deduction for Expenditure on Scientific Research

Introduction Section 35 provides deductions for expenses on scientific research, either conducted in-house or outsourced. It encompasses revenue and capital expenditures related to business, as well as contributions to approved external entities.

Key Provisions

  • Scientific Research Definition: Activities advancing knowledge in natural/applied sciences, agriculture, or medicine. Research must relate to business for deductions.
  • In-House Research:
  • Revenue Expenditure [Section 35(1)(i)]: Deductible if incurred during business operations or within three years prior to commencement.
  • Capital Expenditure [Section 35(1)(iv) and Section 35(2)]: 100% deductible except for land acquisition. Deduction is also allowed for capital expenditure incurred within 3 years prior to commencement of business.
  • Expenditure on Approved Research [Section 35(2AB)]: Deductible for companies in biotechnology or manufacturing (excluding Eleventh Schedule items), subject to prescribed approvals.
    • Payments to External Entities:
  • Approved Scientific Research Associations [Section 35(1)(ii)]: Deduction allowed for scientific research donations.
  • Universities and Colleges [Section 35(1)(iii)]: Applicable to contributions for scientific, social science or statistical research.
  • National Laboratories/IITs [Section 35(2AA)]: Deduction is available to any assessee making payments to a National Laboratory, University, IIT, or other approved institution/person.
  • Indian Companies [Section 35(1)(iia)]: Deductible for donations to companies engaged in scientific research.

Deduction Rates:

  • In-House Research: 100% of actual expenditure from AY 2021-22.
  • Payments to External Entities:
  • Scientific Research: 100% deduction from AY 2021-22.
  • Social/Statistical Research: 100% deduction from AY 2021-22.

Conditions for Deductions:

  • Contributions must be made to approved entities.
  • Applications for approvals are submitted via prescribed forms and reviewed by authorities.
  • Recipients must issue certificates (Form 10BE) and file donation statements (Form 10BD) as per procedure laid down under Rule 18AB.

Consequence of Default:

If such research association, university, college, other institution or company fails to furnish such statement or certificate, it shall be liable for payment of fee under Section 234G. Further, penalty under Section 271K shall also be levied.

Special Provisions:

  • Unabsorbed Capital Expenditure: Can be carried forward like depreciation.
  • Asset Transfers: Gains from unutilized research assets are taxed under “Business Income” or “Capital Gains.”

 

Approval of Research Association or College or University under Section 35

 

Introduction
Section 35 of the Income-tax Act allows deductions for contributions to research associations, universities, colleges, or other institutions for scientific research, social science or statistical research. The deduction applies only if the recipient entity is approved under the Income-tax Act.

Key Provisions and Application Process

Application for Approval ( Rule 5C )

  • Institutions or universities must apply in Form 3CF to the Commissioner/Director of Income-tax during the financial year preceding the assessment year for approval.If such association claims exemption under Section 10(21), annexure to the application shall also be filled.
  • Applications must be filed electronically, verified with a digital signature or electronic verification code.

Rectification of Application

  • Deficiency notices are issued within 1 month of receipt.
  • Applicant must rectify deficiencies within 15 days of notice, extendable on request, but not beyond 30 days in total. If unresolved, the application may be deemed invalid after approval from the Central Government.

Grant of Approval

  • Applications are reviewed for genuineness, and recommendations are sent to the Member (IT), CBDT within 3 months of receipt.
  • The Central Government may request additional information and publish approved institutions in the Official Gazette.

Withdrawal of Approval

  • Approval can be withdrawn if activities cease, are found non-genuine, or violate conditions under Rules 5D or 5E .
  • A reasonable opportunity to respond must be provided before withdrawal.

Conditions for Approval

For Research Associations ( Rule 5D )

  • Sole objective must be scientific, social science, or statistical research.
  • Maintain audited books of accounts and file an audit report with the Commissioner/Director of Income-tax by the due date under Section 139(1).
  • Submit annual research activity reports, including research notes, published articles, and patents applied for. And submit such statement to the Commissioner/Director of Income-tax by the due date under Section 139(1).
  • The Commissioner/Director of Income Tax may, after enquiry, report to the Central Government within six months of filing the return under Section 139(1), if a research association fails to maintain books, furnish audit reports or statements, ceases genuine research activities, or violates approval conditions.

For Universities, Colleges, or Other Institutions ( Rule 5E )

  • Funds must be utilized for research purposes, conducted by faculty or enrolled students.
  • Maintain audited, separate accounts for research funds and provide an audit report by the due date under Section 139(1).
  • The applicant must submit to the Commissioner/Director of Income Tax, by the due date under Section 139(1), a statement detailing research work done, published articles, patents/rights applied or registered, and proposed research projects with financial allocations.
  • The Commissioner/Director of Income Tax may, after enquiry, report to the Central Government within six months of the return filing under Section 139(1), if a university, college, or institution fails to maintain books, furnish audit reports or statements, ceases genuine research, or violates approval conditions.

 

Filing of Intimation by Research Association under Section 35

 

Introduction
Notifications issued under Section 35(1)(ii)/(iia)/(iii) for research associations, universities, colleges, institutions, or companies before April 1, 2021, remain valid only if these entities file an intimation in Form 10A. The latest due date for filing this intimation is June 30, 2024 [Circular No 7/2024, Dated 25-04-2024]. Valid notifications remain effective for five consecutive assessment years starting from April 1, 2022.

Key Provisions and Filing Process

Filing Intimation

  • Form:Intimation is filed in Form 10A with the Principal Commissioner or Commissioner authorised by CBDT.
  • Documents Required:
  • Self-certified copy of the instrument or evidence of establishment.
  • Self-certified registration documents (e.g., Registrar of Companies or Public Trusts).
  • Registration under the Foreign Contribution (Regulation) Act, if applicable.
  • Copy of the existing notification granting approval under Section 35.

Mode of Submission

  • Digital Signature or E-Verification Code:Intimation must be filed electronically and verified by the authorised signatory.

Unique Registration Number (URN)

  • A 16-digit alphanumeric URNis issued by the Principal Commissioner or Commissioner upon receipt of a valid intimation.

Cancellation of URN
The URN may be cancelled if:

  1. The intimation lacks required information or documents.
  2. Incorrect or false information or documents are submitted.
  3. Submission requirements (manner or verification) are not followed.

Procedure for Cancellation:

  • The applicant will be given a reasonable opportunity to present their case before cancellation.
  • Upon cancellation, the URN is deemed to have never been issued.

 

Filing of Statement and Issue of Certificate for Donations Made to Research Institutions

 

Introduction:
Deduction under Section 35(1)(ii)/(iia)/(iii) is allowed for donations to approved research institutions only if the donee files a statement of donation in Form 10BD and issues a certificate in Form 10BE to the donor.

Eligible Institutions:
The deduction applies to contributions made to:

Statement of Donation ( Form 10BD ):

  • Filing Requirement: Donees must file Form 10BD electronically using a digital signature or Electronic Verification Code (EVC).
  • Due Date: Form 10BD must be filed by May 31 of the financial year immediately following the year in which the donation was received.
  • Verification: The statement must be verified by an authorized person.

Certificate of Donation ( Form 10BE ):

  • Filing Requirement: Donees must issue Form 10BE to donors, specifying the amount donated during the financial year.
  • Due Date: The certificate must be issued by May 31 of the financial year immediately following the year in which the donation was received.
  • Purpose: This certificate serves as evidence for the donor to claim the deduction.

Determination of Amount Received from Donors:

  • All donations of the same nature from a donor in a financial year must be considered.
  • If a donation is made jointly, the amount is attributed proportionally among donors unless otherwise specified.

 

Procedure to Obtain Approval Under Section 35(2AA) and 35(2AB)

 

Introduction:
Section 35(2AA) allows a deduction for payments made to National Laboratories, Universities, IITs, or specified persons for scientific research upon filing Form 3CG .
Section 35(2AB) provides a deduction for in-house R&D expenditure incurred by companies engaged in biotechnology or manufacturing upon filing Form 3CK

Approval Under Section 35(2AA)

  • Eligible Entities: National Laboratories, Universities, IITs, or specified persons.
  • Application Process:
  • File Form 3CG .
  • The head of the National Laboratory or the University or the Indian Institute of Technology or Principal Scientific Adviser if he is satisfied that it is feasible to carry out the scientific research programme, pass an order in Form 3CH within two months of receiving the application. However, an order rejecting application shall only be passed after providing a reasonable opportunity of being heard.
  • The National Laboratory, University, Indian Institute of Technology or specified person (herein after referred as applicant) shall issue a receipt of payment for carrying out an approved programme of scientific research in Form 3CI .
    • Approval Conditions:
  • Programme must not relate to market research, sales promotion, quality control, testing, commercial production, style changes, or similar routine activities.
  • Prescribed authority to submit Form 3CJ to specified authority within 3 months of granting approval.
  • Applicant to submit annual progress and expenditure statement to specified authority.
  • Prescribed authority cannot extend programme duration or approve cost escalation.
  • Applicant to maintain separate audited accounts for each programme and furnish them by 31st October each succeeding year.
  • Assets acquired for the programme cannot be disposed of without specified authority’s approval.
  • On completion, applicant to jointly submit:
    • A completion certificate along with a copy of the report on the research activities carried out;
    • Salient features of the result obtained; and
    • Its further application for commercial exploitation;
  • Prescribed authority to furnish audited statement of accounts to specified authority within 6 months of completion.

Approval Under Section 35(2AB)

  • Eligible Applicants:
    Companies engaged in biotechnology or manufacturing (excluding items in the Eleventh Schedule).
  • Application Process:
  • File Form 3CK .
  • The Secretary of the Department of Scientific and Industrial Research (DSIR) issues an order in Form 3CM , if he is satisfied the prescribed conditions are fulfilled. However, an order rejecting application shall only be passed after providing a reasonable opportunity of being heard.
    • Approval Conditions:
  • The R&D facility should not include market research, quality control, testing, or similar activities.
  • DSIR submits electronic reports:
    • Part A of Form 3CL for facility approval.
    • Part B of Form 3CL for expenditure eligibility.
  • Form 3CL to be submitted electronically to the jurisdictional Principal CCIT/CCIT/PDGIT/DGIT:
    • Within 120 days of approval (Part A).
    • Within 120 days of audit report (Part B).
  • Company to keep separate audited accounts for each facility and submit Form 3CLA by due date under Sec. 139(1).
  • Disposal of assets requires prior approval from the prescribed authority.

 

Deduction for Expenditure on Skill Development Project

 

Introduction

Companies incurring expenditure on notified skill development projects are eligible for deductions under Section 35CCD.

  • Assessment Years 2013-14 to 2020-21: Weighted deduction of 150% of actual expenditure.
  • From Assessment Year 2021-22 onwards: Deduction is 100% of actual expenditure.

Eligibility

  • Companies engaged in manufacturing or production of any article or thing (not being alcoholic spirits and tobacco products) or providing specified services can claim the deduction.
  • Deductible expenditure excludes costs for land or buildings and applies only to notified skill development projects.

Skill Development Project Requirements

  • Training facilities (set up by the Central Government, State Government or Local Authority) must be affiliated to or approved/empanelled by:
  • National or State Councils for Vocational Training.
  • National Skill Development Agency.
  • Relevant Central or State Government authorities.
    • Projects must provide training to potential or newly recruited employees. Training for employees after six months of recruitment is ineligible. [Press Release, Dated 18-7-2013]
    • Companies must maintain separate books of account for the project and get them audited.

Application Process

  • Eligible companies must apply to the National Skill Development Agency in Form 3CQ , adhering to guidelines under Rule 6AAF .
  • Deduction is not available under other provisions of the Act for the same expenditure in any year.

 

Guidelines for Approval of Skill Development Project

 

Introduction
For claiming deduction under Section 35CCD, an eligible company must obtain notification for a skill development project. The company is required to apply to the National Skill Development Agency (NSDA) in Form 3CQ and comply with prescribed conditions, including maintenance and audit of separate books of account.

Eligibility and Conditions

A company engaged in manufacture or production of any article or thing other than alcoholic spirits or tobacco products, or a company providing specified services, may claim deduction under Section 35CCD for expenditure (excluding land or building cost) incurred on a notified skill development project.

To obtain notification, the company shall:

  • Apply to the NSDA as per Rule 6AAF ; and
  • Fulfil the conditions laid down in Rule 6AAG .

A project may be notified only if undertaken by an eligible company in separate facilities of a training institute.

Meaning of Eligible Company

An eligible company includes companies engaged in manufacture or production of articles or things not listed at serial numbers 1 and 2 of the Eleventh Schedule, or companies providing specified services such as accounting, architecture, automobile repair, banking and insurance services, beauty and cosmetology, cable or DTH services, cargo handling, construction, courier services, design, event management, facilities management, fire and safety services, food processing, health and wellness, home décor, healthcare, hospitality, logistics, market research, media, mining, packaging and warehousing, port and maritime services, power sector services, private security, refrigeration and air-conditioning, repair and maintenance, retail marketing, telecom, and travel and tourism.

Meaning of Training Institute

A training institute must be one of the following:

  • Set up by the Central Government, State Government or Local Authority;
  • Affiliated to National Council for Vocational Training or State Council for Vocational Training;
  • Affiliated, approved or empanelled by the NSDA;
  • Affiliated or approved by the Central Government and certified by the National Council for Vocational Training as following equivalent standards;
  • Affiliated or approved by the State Government and certified by the National Council for Vocational Training or State Council for Vocational Training as following equivalent standards.

Application Process

Before undertaking a project, the eligible company shall submit Form 3CQ in duplicate to the NSDA and send a copy to the jurisdictional Commissioner or Director of Income-tax. An acknowledgement from NSDA must accompany the application.

The application must include:

  • Detailed note on the project;
  • Estimated expenditure and expected date of completion;
  • Letter of concurrence from the training institute.

Defects in Application

If defects are found, NSDA shall intimate the applicant within one month from the date of receipt. The applicant must rectify the defect within 15 days or within an extended period not exceeding 30 days in total. If defects are not rectified, NSDA shall recommend treating the application as invalid, and CBDT may pass an order accordingly.

Recommendations for Approval or Rejection

When the application is complete, NSDA may conduct necessary inquiry and seek documents to verify the genuineness of activities. NSDA shall send its recommendation to CBDT within two months from the end of the month in which a complete application was received.

The jurisdictional CIT or DIT shall separately send recommendations to NSDA within one month of receiving the application copy, after examining compliance with the Income-tax Act.

Issue of Notification

CBDT shall issue notification in Form 3CR within 15 days from the end of the month of receiving NSDA’s report. The notification remains effective for a prescribed period, not exceeding three assessment years. If activities are satisfactory, CBDT may extend the notification in consultation with NSDA.

If NSDA recommends rejection, CBDT shall pass an order rejecting the application.

Withdrawal of Notification

CBDT may rescind the notification at any time if it is satisfied that:

  • The company or training institute has ceased activities;
  • The activities are not genuine; or
  • Activities are not carried out as per provisions or conditions of notification.

An opportunity of being heard shall be provided before withdrawal. Copies of orders shall be sent to the applicant, training institute, NSDA and jurisdictional authorities.

Conditions for Notification

The company must maintain separate books of account for the notified project and have them audited by a Chartered Accountant. The audit report shall comment on:

  • True and fair view of accounts;
  • Genuineness of activities;
  • Fulfilment of relevant conditions.

A project is not eligible where training is provided to existing employees whose training commences after six months of their recruitment.

Expenses Eligible for Deduction

All expenditure incurred wholly and exclusively for a notified project, except land or building cost, is eligible. Any expenditure reimbursed or reimbursable to the company is not eligible.

Furnishing of Audited Statement

On or before the due date under Section 139(1), the company shall furnish to the CIT or DIT the audited statement of accounts, audit report and amount of deduction claimed.

Report for Rescinding Notification

The CIT or DIT may report to CBDT for rescinding the notification if the company has not maintained required books, has not furnished documents, has ceased activities, or its activities are not genuine or not in accordance with provisions or conditions. NSDA may also recommend withdrawal if activities are not genuine.