Section 35AD of the Income-tax Act: Eligibility and Deduction Rules

In summary

Section 35AD of the Income-tax Act, 1961 provides an investment-linked deduction for qualifying capital expenditure incurred by specified businesses. It applies only when the business and expenditure meet the statutory conditions.

• Eligible businesses can generally deduct 100% of qualifying capital expenditure.
• The provision covers specified activities, including cold chains, agricultural warehouses and qualifying hospitals and hotels.
• Expenditure on land, goodwill and financial instruments is excluded.
• Payments exceeding Rs. 10,000 to one person in a day must meet the prescribed payment-mode requirements to qualify.
• Assets for which the deduction is allowed must generally remain in the specified business for 8 years.
• From Tax Year 2026–27, Section 46 of the Income-tax Act, 2025 provides the corresponding deduction.

Before claiming the benefit, verify the business category, commencement conditions, expenditure and supporting records. The deduction affects business taxation, not the approval of a personal home loan.

Section 35AD of the Income-tax Act, 1961 allows qualifying taxpayers to deduct capital expenditure incurred wholly and exclusively for specified businesses. This provision is an investment-linked tax incentive. Instead of claiming ordinary depreciation over several years for eligible expenditure, a qualifying business can claim the prescribed deduction.

For example, a business establishing an agricultural warehouse may invest in storage buildings and specialised equipment. When the relevant conditions are satisfied, eligible costs can qualify under Section 35AD. However, the deduction does not apply to all capital investments. The business must fall within the statutory definition, and the expenditure must satisfy the applicable requirements.

For FY 2025–26, reported in Assessment Year (AY) 2026–27, Section 35AD of the 1961 Act remains applicable.

Source: Income Tax Department, Section 35AD.

Section 35AD applies to specified businesses listed in the legislation, subject to their commencement and operational conditions. The qualifying activities include:

• Setting up and operating cold chain facilities.
• Establishing warehouses for agricultural produce.
• Building and operating hotels classified as two-star or above by the Central Government.
• Building and operating hospitals with at least 100 patient beds.
• Developing housing under specified notified affordable housing or slum redevelopment schemes.
• Producing fertiliser in India.
• Setting up eligible inland container depots or container freight stations.
• Undertaking beekeeping and producing honey or beeswax.
• Establishing warehousing facilities for storing sugar.
• Laying specified pipelines for natural gas, petroleum products or iron ore slurry.
• Setting up notified semiconductor wafer fabrication units.
• Developing or operating qualifying new infrastructure facilities.

Not every business within these industries automatically qualifies. Certain activities must satisfy project notifications, ownership conditions, prescribed approvals or commencement dates. For example, a residential developer cannot claim Section 35AD merely because a project is marketed as affordable housing. The project must satisfy the specific government-scheme and notification requirements.

Source: Income Tax Department, Business or Profession — Investment-linked Incentives.

A taxpayer carrying on a qualifying specified business can claim the deduction, subject to the statutory conditions. The provision is not restricted to companies in every case. However, certain specified businesses have additional entity-related requirements.

For example, qualifying pipeline and infrastructure businesses can face conditions involving eligible Indian companies, consortia or prescribed authorities. A business must also satisfy the relevant requirements concerning its establishment and machinery. These generally prevent a qualifying specified business from being created merely by splitting or reconstructing an existing business.

Restrictions also apply to transferring previously used plant and machinery into the specified business, subject to statutory exceptions. Before claiming, check the business activity, legal entity and applicable income-tax regime together.

Qualifying expenditure must be capital in nature and incurred wholly and exclusively for the specified business. Depending on the activity, eligible expenditure may include business buildings, machinery and equipment.

For example, a qualifying cold chain facility may require refrigeration equipment, temperature-controlled storage and related infrastructure. The expenditure must be connected to the specified business rather than an unrelated operation.

The provision can also cover qualifying expenditure incurred before the business starts operations. However, such expenditure must meet the statutory capitalisation condition to qualify in the year of commencement. The deduction is not automatically available for every item entered in a business's fixed-asset register. The nature of the asset, expenditure and associated activity must be assessed.

Section 35AD specifically excludes expenditure incurred to acquire land, goodwill or financial instruments. It also restricts payments that do not meet prescribed banking or electronic payment requirements.

The main exclusions and conditions are:

• Land: The cost of acquiring land is excluded.
• Goodwill: The acquisition cost of goodwill does not qualify.
• Financial instruments: Expenditure on financial instruments is excluded.
• Non-compliant payments: Payments exceeding Rs. 10,000 to a person in a day must satisfy the prescribed payment modes.
• Unrelated expenditure: Costs that are not wholly and exclusively for the specified business do not qualify.
• Previously used plant or machinery: Restrictions apply, subject to specific statutory exceptions.

The payment restriction is not a prohibition on every expenditure above Rs. 10,000. It concerns whether payments exceeding the prescribed threshold are made using acceptable payment methods. Likewise, the previously used machinery restriction has exceptions, including specified imported machinery and limited used machinery within the statutory threshold.

Source: Income Tax Department, Section 35AD.

The Section 35AD deduction generally equals 100% of eligible capital expenditure incurred for a qualifying specified business.

Deduction = Eligible capital expenditure × 100%

Example: An agricultural warehouse

Consider a business establishing an eligible agricultural warehouse. Assume it satisfies the applicable statutory conditions and incurs the following project costs.

The eligible expenditure is calculated as Rs. 60 lakh plus Rs. 25 lakh. Therefore, the potential deduction is Rs. 85 lakh. The Rs. 30 lakh land acquisition cost is excluded.

This does not mean the business receives Rs. 85 lakh as a cash benefit or tax refund. The actual tax effect depends on the business's income, applicable tax provisions and eligible loss adjustments.

Source: Income Tax Department, Section 35AD.

Yes. Certain qualifying capital expenditure incurred before the specified business starts operations can be deducted in the year the business commences. However, the relevant expenditure must be capitalised in the books on the commencement date.

For example, a warehouse operator may purchase eligible machinery before beginning commercial operations. The expenditure must be properly recorded and connected to the qualifying specified business. The deduction cannot be claimed merely because the asset was purchased before operations began. The applicable statutory requirements and commencement conditions must also be met.

Retain invoices, commissioning documents and accounting records establishing the relevant dates.

Yes. An eligible loss arising from a specified business covered by Section 35AD can be carried forward under the applicable rules. Section 73A of the Income-tax Act, 1961 provides the relevant framework. Such losses cannot be adjusted against every type of business or personal income. They can be set off against profits from qualifying specified businesses as permitted by law.

For example, a qualifying warehouse may incur substantial expenditure before earning sufficient operating income. If an eligible specified-business loss remains after the permitted adjustments, it can be carried forward.

Unlike ordinary business losses subject to an eight-year carry-forward limit, qualifying specified-business losses can be carried forward without that same fixed eight-year limit. However, applicable filing and other statutory conditions must be satisfied. The business should retain records identifying the original loss and subsequent adjustments.

Source: Income Tax Department, Section 73A; Income Tax Department, Set-off and Carry-forward of Losses.

You cannot claim ordinary depreciation again on expenditure for which a Section 35AD deduction has already been allowed. This prevents the same expenditure from receiving duplicate deductions.

For example, suppose a warehouse business claims qualifying machinery expenditure under Section 35AD. It cannot also claim depreciation on that same deducted cost as though the investment had not received the special allowance. However, other assets or expenditure not covered by the Section 35AD deduction may need separate treatment under ordinary depreciation rules.

Maintain records showing which assets and costs have already received the special deduction.

Source: Income Tax Department, Section 35AD.

Assets for which a Section 35AD deduction has been allowed must generally continue to be used for the specified business for eight years. The period begins with the previous year in which the asset is acquired or constructed.

If the asset is used for another purpose during this period, the law can require an adjustment to taxable business income. The adjustment generally considers the deduction previously allowed, reduced by the depreciation that would have been allowable if the special deduction had not been claimed.

For example, a business that claims an eligible warehouse asset under Section 35AD cannot assume it can immediately repurpose the asset for unrelated activities without tax consequences. Certain statutory exceptions apply. Before selling, transferring or changing the use of a significant asset, the business should examine the applicable treatment.

Source: Income Tax Department, Section 35AD(7A) and (7B).

Section 35AD provides an investment-linked deduction for qualifying specified-business expenditure. Section 32 provides ordinary depreciation on eligible business assets.

The main differences are:

Last updated: 27th October 2026

For example, an eligible cold chain business may claim qualifying expenditure under Section 35AD. A consulting firm buying ordinary office equipment may instead claim eligible depreciation under Section 32. The two provisions should not be treated as interchangeable.

The Income-tax Act, 2025 came into force on 1st April, 2026 and reorganised the provisions governing business deductions. Section 46 provides the corresponding investment-linked deduction for qualifying specified businesses.

For income earned during FY 2025–26, Section 35AD of the 1961 Act remains relevant. For Tax Year 2026–27 onwards, the corresponding provision must be considered under the 2025 Act.

The newer framework continues to recognise specified businesses, qualifying capital expenditure and statutory restrictions. The change in section number does not make every business investment eligible. Nor does it remove the need to comply with prescribed payment modes, asset-use requirements and other conditions.

Source: Income Tax Department, Income-tax Act, 2025, Section 46.

You can claim the deduction through the appropriate business-income computation and schedules in the applicable income-tax return. The exact return form depends on the taxpayer's legal status and income sources.

The general steps are:

1. Confirm that the business falls within the statutory list.
2. Verify commencement dates and required permissions.
3. Identify qualifying capital expenditure.
4. Remove excluded costs, including land and goodwill.
5. Check payment methods against the prescribed requirements.
6. Review restrictions on previously used machinery.
7. Confirm that duplicate depreciation has not been claimed.
8. Complete the applicable business-income and loss schedules.
9. File within the relevant due date and retain supporting records.

If the deduction creates a specified-business loss, the applicable loss-reporting requirements must also be satisfied. The return should reflect the actual legal entity claiming the deduction. A company cannot automatically transfer its eligible tax deduction to an individual shareholder's personal return.

Source: Income Tax Department, e-Filing Portal.

Maintain records establishing the business's eligibility, expenditure and continued use of the relevant assets. Useful records include:

• Business incorporation or registration documents, where applicable.
• Government notifications and project approvals.
• Purchase invoices and construction contracts.
• Bank statements and prescribed payment records.
• Asset registers and accounting schedules.
• Commissioning or commencement records.
• Audited financial statements, where applicable.
• Previous income-tax returns and loss schedules.
• Records showing continued use of deducted assets.

For example, a warehouse operator should retain evidence that claimed assets remain in the qualifying storage business. An invoice alone may not establish that the expenditure meets all the statutory conditions. The documentation must support both the amount claimed and the business activity.

A Section 35AD deduction can reduce the taxable income of a qualifying business. However, it does not directly determine the personal home loan eligibility of its owner.

Consider Arjun, a 38-year-old entrepreneur in Pune. He has a CIBIL Score of 770 and earns income from an agricultural warehousing business. Suppose the business claims Rs. 85 lakh of qualifying capital expenditure under Section 35AD. The deduction may materially affect taxable business profit. However, the deduction does not mean Arjun personally has Rs. 85 lakh less cash available for monthly repayments. Similarly, a company claiming the deduction does not mean its shareholders can treat the company's tax allowance as personal income.

Bajaj Finance assesses self-employed home loan applicants using income stability, financial obligations, credit history and relevant financial records. For eligible self-employed applicants, Bajaj Finance Home Loan interest rates start from 8.05% p.a.*, subject to product terms and eligibility.

When Arjun is ready to finance a residential property, he can check his Bajaj Finance Home Loan eligibility against his actual personal financial profile. The lender may request income-tax returns, financial statements and bank records.

Start by confirming the business's eligibility and the relevant income period. Verify the capital expenditure, payment method, commencement conditions and restrictions on previously used machinery. Check that the same costs have not also received ordinary depreciation. Where the deduction creates a loss, maintain records supporting the amount carried forward and its subsequent adjustment.

For business owners planning a personal home purchase, the tax deduction should remain separate from household affordability. You can use the Bajaj Finance home loan EMI calculator to compare monthly repayments with available income.