Preliminary Expenditure Incurred for Setting Up Business
Updated on: Nov 22nd, 2023
|
3 min read
Who can Claim this Deduction?
- Indian company
- Person (other than company) who is resident in India
What Expenditure can be Claimed as a Deduction?
Expenditure incurred for the following items can be claimed as a deduction:- Preparation of feasibility report
- Preparation of project report
- Conducting market survey necessary for business
- Engineering services relating to business
- Preparation of agreements between the assessee and any other person for setting up and or conduct of business
- Drafting and printing of Memorandum of Association (MoA) and Articles of Association (AoA)
- Incorporation of a company
- Public issue of shares or debentures of the company
When Should the Expenditure be Incurred?
- Before the commencement of business, OR
- After the commencement of business in relation to the extension or setting up of a new unit.
What Amount Qualifies as a Deduction?
The maximum amount allowable as a deduction is 5% of the cost of project or 5% of capital employed whichever is higher. The number derived above is compared with the preliminary expenditure incurred. The lease of these 2 is the amount that qualifies as a deduction. This amount has to be claimed as a deduction in 5 equal installments. For Example: “M/S Servex Motors Limited incurs a preliminary expenditure of Rs 5 lakh. The cost of the project is Rs 50 lakh and the capital employed is Rs 40 lakh.” Here is how preliminary expenditure allowed as a deduction will be calculated:- 5% of Cost of Capital = 5% of Rs 50 lakh = Rs 2.5 lakh
- 5% of Capital Employed = 5% of Rs 40 lakh = Rs 2 lakh
- Though the company has incurred Rs 5 lakh as preliminary expenditure, the eligible amount is Rs 2.5 lakh. 1/5th of Rs 2.5 lakh, i.e Rs 50,000 can be claimed as deduction every year for 5 consecutive years.
Finish your E-filing before 31st July 2017
- ClearTax makes it very easy to E-File your ITR
- E-Filing takes only a few minutes
- Our experts help you on live chat and email
Quick Summary
Section 35D of the Income Tax Act allows businesses to claim deduction for preliminary expenditures such as feasibility reports, project reports, and market surveys. The deduction can be claimed before or after business commencement, up to 5% of project cost or capital employed. Deduction amount is determined yearly based on incurred preliminary expenses. ClearTax offers easy E-filing services with expert support.
Was this summary helpful?
Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.
Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.
CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.
Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.
Cleartax is a product by Defmacro Software Pvt. Ltd.
Company PolicyTerms of use
ISO 27001
Data Center
SSL Certified Site
128-bit encryption