Section 35AD Income Tax Act: Deduction for Capital Expenditure on Specified Business

What is Section 35AD?

Section 35AD permits, at the assessee's option, a deduction of the whole of eligible capital expenditure incurred wholly and exclusively for carrying on a specified business. The deduction is generally claimed in the previous year in which qualifying expenditure is incurred. Qualifying pre-commencement expenditure is allowed in the year operations begin if capitalised in the books on the commencement date.

The deduction is not a general write-off for every business investment: only statutorily listed businesses, subject to commencement dates and other conditions, qualify. The corresponding Section 46 of the 2025 Act follows the same core framework.

Specified businesses eligible for the deduction

Section 35AD(8)(c) listed the following 14 categories, carried forward in Section 46(11)(d) of the Income-tax Act, 2025. Individual categories may require government notification, classification, approvals or other conditions.

Eligibility is also subject to the relevant statutory commencement dates. For example, cross-country natural gas pipeline operations generally have a 1 April 2007 threshold; hotels and hospitals have a 1 April 2010 threshold; certain other categories have later commencement thresholds.

Conditions and expenditure not eligible

Basic conditions

• The business must not be formed by splitting up or reconstructing an existing business, subject to applicable statutory exceptions.
• Previously used machinery or plant is generally restricted; the law provides specific relief for qualifying imported machinery and where transferred used plant does not exceed 20% of the total value of plant and machinery.
• Pipeline businesses must satisfy ownership, Petroleum and Natural Gas Regulatory Board approval, notified status, common-carrier capacity and other prescribed conditions.
• Qualifying infrastructure businesses must satisfy the applicable ownership and government or statutory-body agreement conditions.
• The assessee must elect the deduction and maintain evidence supporting the amount, timing, business purpose and eligibility.

Excluded capital expenditure

• Acquisition of land, goodwill or financial instruments.
• Payments or aggregate payments to a person in a day exceeding Rs. 10,000 when made otherwise than through the permitted banking or electronic modes.
• Expenditure that fails the wholly-and-exclusively test or relates to a business outside the specified categories.

Qualifying expenditure cannot also be deducted under another provision. Where the statutory deduction has been allowed, the same expenditure is not separately depreciated.

Section 35AD subsections explained

Subsections (1) and (2): deduction and eligibility

Subsection (1) governs the optional capital-expenditure deduction and pre-commencement expenditure. Subsection (2) sets out restrictions on reconstruction and used machinery, and additional requirements for pipeline and infrastructure businesses.

Subsections (3) and (4): no double benefit

These provisions prevent overlapping specified-business deductions under Section 10AA and relevant Chapter VI-A income deductions, and prevent claiming the same capital expenditure again under another section or another year, subject to the statutory wording.

Subsections (5), (6) and (6A): commencement dates and special rules

Subsection (5) prescribes the various qualifying commencement dates. Subsection (6) contains a special historical deduction for certain natural-gas pipeline expenditure associated with operations commenced between 1 April 2007 and 31 March 2009. Subsection (6A) addresses qualifying hotels whose owner transfers operation while continuing to own the hotel.

Subsection (7): related anti-avoidance rules

Selected provisions of Sections 80A and 80-IA apply, so far as relevant, to goods, services and assets of specified businesses, including rules addressing transactions and valuation.

Subsections (7A), (7B) and (7C): eight-year use rule

An asset on which the deduction is allowed must be used only for the specified business for eight years beginning with the year of acquisition or construction. If diverted to another use within that period, the deduction previously allowed, reduced by depreciation that would have been allowable had the deduction not been claimed, may become taxable business income, subject to statutory exceptions. Section 46(9) of the 2025 Act contains the corresponding rule.

Subsection (8): statutory definitions

The section defines associated person, cold chain facility, infrastructure facility and specified business; it also addresses qualifying imported machinery, the 20% used-machinery tolerance and excluded expenditure.

Selected definitions

Associated person: includes persons meeting specified tests involving management, control, capital, at least 26% voting power, board appointments or guarantees of at least 10% of total borrowings.

Cold chain facility: scientifically controlled storage or transport facilities, including refrigeration, for eligible agricultural, animal, marine, horticultural and processed food products.

Infrastructure facility: includes specified roads, bridges, rail systems, highway projects, water and sanitation systems, ports, airports, inland waterways and navigational channels.

Section 46 of the Income-tax Act, 2025

Section 46 is titled Capital expenditure of specified business. Its subsections address the option to claim a deduction, pre-commencement capitalisation, business eligibility, overlapping deductions, qualifying commencement dates, the eight-year asset-use rule and statutory definitions. References to earlier section numbers are reorganised for the new Act; therefore, cross-references must be checked against the 2025 legislation rather than carried over mechanically.

The new Act uses the term tax year in place of the earlier previous-year terminology. The relevant year and applicable savings provisions should be checked before filing or amending a return.

Example: how the deduction works

Assume a qualifying cold chain business incurs Rs. 80 lakh on eligible plant and Rs. 20 lakh to acquire land, with all eligible payments made through permitted modes. Subject to every statutory condition, the potential Section 46 capital-expenditure deduction is calculated as follows:

Eligible plant: Rs. 80,00,000 | Land excluded: Rs. 20,00,000 | Potential deduction: Rs. 80,00,000

This is an illustration, not a determination of tax payable. Tax losses, other deductions, return disclosures and applicable anti-avoidance rules require separate consideration.

Historical amendments and applicability

Section 35AD was inserted by the Finance (No. 2) Act, 2009, with effect from 1 April 2010. Its scope was subsequently expanded through amendments including the Finance Acts of 2010, 2011, 2012, 2014 and 2016. The Finance Act, 2016 omitted the former subsection (1A) with effect from 1 April 2018 and added provisions concerning infrastructure businesses and definitions. The Finance Act, 2017 introduced restrictions on certain non-banking payments with effect from 1 April 2018. Earlier commencement dates and historical provisions remain important when examining old assessment years.

For the full wording of the historic provision, including each category, subclause and amendment, consult the official text below.

Official statutes and resources

• Income Tax Department: Section 35AD, Income-tax Act, 1961
• Income Tax Department: Income-tax Act, 2025 (official PDF), Section 46
• Income Tax Department: Deductions allowable to taxpayers
• India Code: Central legislation repository

Frequently asked questions