Section 35AD of Income Tax Act – Capital Expenditure Deduction Explained

Key Highlights
 

1. Section 35AD gives a 100% tax deduction on capital expenditure for ‘special’ businesses. 
    
2. Only those businesses which are involved in sectors like cold storage, hospitals, pipelines, hotels, etc. are eliogible for the deduction.
    
3. Businesses must follow the old tax regime, and do not use more than 20% second-hand machinery. 

Section 35AD of Income Tax Act gives you a full tax deduction for money spent on certain businesses. These businesses can be cold chains, hospitals with 100+ beds, warehousing etc. 

For example, Ram started a company in April 2024 and spent ₹1,00,00,000 on a cold-chain warehouse. Normally, capital costs are not fully deductible in one year. But under Section 35AD, Ram claimed the entire deduction in 2024-25. On a profit of ₹2,00,00,000, he deducted ₹1,00,00,000. So, tax applied on only ₹1,00,00,000. 

The table summarises Ram’s situation:
 

This way, Ram saved ₹30,00,000. All these acts can confuse a beginner. So, read this blog to understand Section 35AD of Income Tax Act in detail. 

Importance of Section 35AD Of Income Tax Act

Section 35AD of the Income Tax Act was used to help new sectors. The deduction is allowed in the year the expense is incurred. Now, the question arises: why is this deduction so important? Let’s answer this question with the table given below.
 

‘Sarkari kaam hai ptani paise mile ya na mile!’ With section 35AD, you can stop saying this. Now, you don't have to wait for years to claim your deduction. You can get a 100% deduction of your capital expenditure in the very year it is incurred. 

Do you know that Section 35AD of Income Tax Act does not involve any TDS rules? Deductions do happen, no doubt, but they do not trigger any TDS requirements.

Objectives of Section 35AD Of Income Tax Act:

By providing tax exemptions, the government wanted to promote other things as well through Section 35AD of Income Tax Act. Let’s see the main objectives for it.
 

• More capital spending was encouraged so that a business can grow with better infrastructure, machinery and other resources. 
   
• The section led to a better work environment for the employees.
   
• Specified sectors were promoted by the law. Capital investments were promoted in sectors like cold chains, hospitals, pipelines, and warehousing.
   
• With section 35AD of the Income Tax Act, economic growth was assessed in a broader perspective. The better the infrastructure, the better the job creation and the faster the economic growth and national development. 
   
• Businesses can claim a full deduction in a single year, which leads to better cash flow in the business. Relocation of funds for expansion and other operations was promoted.

TDS Rate Under Section 35AD Of Income Tax Act

No special TDS rate was fixed by Section 35AD of Income Tax Act. However, general TDS rules were to be followed if payments were made to contractors or consultants.
For example, if ₹15 lakh was paid by Ravi to a contractor in March 2025, TDS at 1% or 2% was to be deducted as per Section 194C.
If ₹15 lakh was paid in cash by Ravi, TDS would be made mandatory under other rules and audited.

Eligibility Rules for Claiming Deduction Under Section 35AD

To benefit from Section 35AD deductions, the taxpayer must meet all of the following requirements:

1. The deduction under Section 35AD is available only if the taxpayer chooses to file taxes under the old income tax regime.
    
2. In cases where a company constructs, runs, and maintains an existing infrastructure facility:
    
   1. The business must be incorporated and registered in India.
       
   2. There must be a valid written agreement with a legal authority, state government, central government, or local body for the development, operation, maintenance, or management of the infrastructure facility.
       
   3. The specified business must not have been created by splitting up or reconstructing an already existing business.
       
   4. The business must not be set up using second-hand machinery or plant, except where such used assets do not exceed 20% of the total plant and machinery cost.
       
3. For businesses involved in laying and operating cross-country pipelines for natural gas, crude oil, or petroleum products:
    
   1. The company must be incorporated and registered in India.
       
   2. It must receive mandatory approval from the Petroleum and Natural Gas Regulatory Board (PNGRB).
       
   3. As per PNGRB rules, a prescribed portion of the total pipeline capacity must be offered for use by other entities on a common carrier basis.
       
4. If the specified business is about developing, operating, and maintaining a new infrastructure facility:
    
   1. The company must be incorporated and registered in India.
       
   2. There must be a formal agreement with the central government, state government, a local authority, or any other legal body for the development, operation, and/or maintenance of the facility.
       
5. Expenses spent for purchasing land, financial instruments, or goodwill are not eligible for deduction under Section 35AD.
    
6. Deductions cannot be claimed if any single-day payment above ₹10,000 to a person is made in cash, via a crossed cheque, or a bearer cheque.
    
7. The assessee must have their accounts audited by a Chartered Accountant, and the audit report must be submitted along with the income tax return.
    
8. Any asset for which a deduction under Section 35AD has been claimed and approved must be used for at least 8 consecutive years.
    

Exemption Under Section 35AD Of Income Tax Act

Section 35AD of the Income Tax Act allows businesses to claim a 100% deduction on certain capital expenses. However, not every type of spending qualifies. Costs like plant, machinery, or buildings are allowed, but expenses on land, goodwill, financial instruments, or large cash payments are not.

For example, Anil’s hospital project was started in July 2022. ₹2,00,00,000 was spent on hospital machinery. Under Section 35AD of Income Tax Act, ₹2,00,00,000 was deducted in that year. Later, ₹25,000 was paid by Anil for the land. That ₹25,000 was not allowed as an exemption.

The Officer of Income Tax made sure the land cost was not reduced by Section 35AD of the Income Tax Act. Money spent on goodwill or financial instruments was also not exempted. The table below shows what was exempted and what was not.
 

A similar case happened with Taj GVK Hotels & Resorts Ltd. ITAT ruled that even though the company didn’t directly build the hotel building, it could still claim a 100% deduction under Section 35AD of Income Tax Act. It was for constructing and operating a new hotel, since the facility genuinely falls under a specified business.

Due Date and Compliance Requirements of Section 35AD Of Income Tax Act

To claim the benefits under Section 35AD of Income Tax Act, you need to submit the audit report after getting it checked by a CA. Other conditions, which are mentioned in the table given below, must be fulfilled to become eligible for the deduction. 
 

All conditions must be followed by businesses to use Section 35AD of Income Tax Act correctly. The due date (31st March 2025) for filing the return must not be missed. Only if a return is filed before 31st March 2025, the benefit will be given.

For 2026 filing, follow the calendar:
 

Don’t wait for the due date. Do everything as per the time table

Practical Examples of Section 35AD Of Income Tax Act

Here are some real-life cases where Section 35AD of Income Tax Act has been used:
 

As per the Budget 2024 updates, businesses in warehousing and clean energy will be promoted more under this section. More clarity has been promised.

Conclusion of Section 35AD Of Income Tax Act

Section 35AD of the Income Tax Act was made to help India grow new sectors. Full capital spending can be reduced from business profits. But only when rules are followed, an old regime is chosen, an audit is done, and assets are used for 8 years. Land, goodwill and cash limits are not allowed. With the right planning, tax savings can be big. 

From warehousing to hotels to hospitals, many new industries can grow by using Section 35AD of the Income Tax Act. If rules are missed, the whole deduction is lost. As a famous dialogue says, “Risk to Spiderman ko bhi lena padta hai.” Here, the risk is in not reading the rules.

FAQs of Section 35AD Of Income Tax Act

Are expenses incurred before business commencement eligible?
Yes, pre-commencement capital expenses for specified businesses are allowed if incurred wholly and exclusively for that business.

Does claiming Section 35AD affect MAT / AMT?
Yes, deductions under Section 35AD can trigger Minimum Alternate Tax (MAT) / Alternative Minimum Tax (AMT) calculations for certain taxpayers, so you must check AMT/MAT rules when claiming them.

Do government grants or subsidies reduce the eligible capital cost?
Yes, subsidies/grants taken into account for determining the actual cost of the asset will reduce the capital cost eligible for deduction.

Can a foreign/non-resident company claim Section 35AD?
Usually, no, for many specified businesses — several categories require the business to be incorporated/registered in India, so non-resident entities must meet those local conditions to claim the deduction.

What paperwork (beyond the CA audit) should I keep?
Keep purchase invoices, supplier contracts, government approvals (e.g., PNGRB for pipelines), agreements, board resolutions and audit working papers — tax officers expect full supporting records.

Can a lessee (tenant) claim the deduction for assets they install?
Yes, tribunals have allowed lessees to claim Section 35AD if they incur eligible capital exzenditure and all other conditions are met. 

Can Section 35AD deduction be claimed along with other sections like 80-IA or 10AA?
No. If you claim Section 35AD deduction, you cannot claim depreciation or similar benefits on the same assets under other sections.

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