Taxation of Preliminary Expenses Under the Income Tax Act: Complete Guide to Section 35D:

Learn how preliminary expenses are taxed under Section 35D of the Income Tax Act, including eligibility, deduction limits, and compliance requirements.

Who Can Claim Section 35D Deduction?

Khush Trivedi

Jul 14, 2026

Last update on Jul 13, 2026

Have you started your business recently & incurred some pre-incorporation expenses or some legal or procedural expenses before the commencement of your business, which are generally of a capital nature & don’t know what the treatment of such expenses is under the Income Tax Act? Then this article is for you

Some of the Expenses:

Drafting the Memorandum and Articles of Association
Commissioning a feasibility or project report
Paying registration fees

Legal Provision

Section 35D of the Income-tax Act, 1961 defined list of such preliminary expenses be written off in five equal instalments instead of being capitalised.

Particulars	Position under the Income-tax Act, 1961
Governing section	Section 35D
Associated rule/forms	Rule 6AB: Form No. 3AE (audit report) & Form No. 3AF (annual statement of particulars, Rule 6ABBB)
Core deduction mechanism	1/5th of eligible expenditure claimed each year for 5 years
Ceiling	5% of cost of project, or for a company 5% of capital employed/Cost of Project, whichever is higher

Cost of the project: Actual cost of fixed assets: land, buildings, leaseholds, plant, machinery, furniture, fittings, and railway sidings (including development costs) shown in the books as of the last day of the year business commences or extension/new unit is completed.

Capital employed (companies only): Aggregate of paid-up share capital, debentures, and long-term borrowings as on the last day of the relevant previous year, computed per the prescribed formula.

Who Can Claim?

An Indian company (incorporated under the Companies Act), irrespective of residential status
Any other assessee (individual, HUF, firm, LLP, AOP, etc.) who is resident in India for the relevant previous year.

Note: The expenditure must be incurred either

(a) Before the commencement of business, or

(b) After commencement, in connection with the extension of an existing undertaking or the setting up of a new unit.

Eligible Expenditure

Available to all eligible assessees
Preparation of a feasibility report or project report.
Conducting a market survey or any other survey necessary for the business.
Engineering services relating to the business.
Legal charges for drafting agreements between the assessee and any other person for setting up or conducting the business.

Available only to companies (in addition to the above)

Legal charges for drafting the Memorandum of Association and Articles of Association.
Printing costs of the Memorandum and Articles of Association.
Fees for registering the company under the Companies Act.
Underwriting commission, broking, and printing/advertisement charges connected with a public issue of shares or debentures, including prospectus-related expenses.

Compliance and Reporting Requirements

Audit Certification Form 3AE

Companies and co-operative societies: no separate audit report is mandated solely for Section 35D, since their accounts are already subject to statutory/tax audits.
Other assessees (individuals, firms, LLPs, AOPs): Books for the year(s) in which the expenditure is incurred must be audited by a chartered accountant, and the audit report must be furnished in Form No. 3AE along with the return of income for the first year the deduction is claimed.

Form 3AF: statement of particulars

Every assessee claiming this deduction must additionally furnish a statement of particulars electronically in Form No. 3AF, under Rule 6ABBB.