Section 35E of the Income-tax Act, 1961 provides a special deduction for eligible expenditure incurred in prospecting for specified minerals or developing a mine or natural mineral deposit. The expenditure is spread across a statutory ten-year period, subject to limits based on income from commercial exploitation.
Section 35E at a glance
1. Eligibility under Section 35E(1)
An Indian company or an individual or other non-company person resident in India engaged in operations connected with prospecting, extraction or production of qualifying minerals may be eligible. The qualifying expenditure must satisfy subsections (2) and (3), and the deduction is calculated for each of the ten relevant previous years.
2. Eligible and excluded expenditure: Sections 35E(2) and (3)
Eligible spending must be incurred wholly and exclusively on prospecting for specified minerals or developing the relevant mine or natural deposit, during the year of commercial production or any of the four immediately preceding years. Amounts funded by another person or authority, and sale, salvage, compensation or insurance receipts relating to property or rights created through the expenditure, are excluded.
The law specifically excludes the acquisition of mineral sites, rights over such sites, mineral deposits or deposit rights, and capital expenditure on buildings, machinery, plant or furniture for which depreciation is admissible under Section 32. General business expenses do not automatically qualify merely because they relate to mining.
3. Ten-year deduction and carry-forward: Section 35E(4)
The annual deduction is the lower of (a) one-tenth of qualifying expenditure and (b) the income from commercial exploitation of the relevant mineral or associated mineral group, computed before the Section 35E deduction. Any unused instalment can be added to the next relevant year's instalment, but cannot be carried beyond the tenth relevant previous year.
Assume eligible prospecting expenditure is Rs. 50,00,000. The annual instalment is Rs. 5,00,000. If the relevant mineral exploitation income for year one is Rs. 3,00,000, the Section 35E deduction is limited to Rs. 3,00,000 and the unused Rs. 2,00,000 may be added to the next year's instalment, subject to that year's income limit and the final ten-year cutoff.
4. Important statutory definitions: Section 35E(5)
Operation relating to prospecting: exploring, locating or proving mineral deposits, including unsuccessful or abortive operations. Year of commercial production: the previous year in which commercial production of a specified mineral or associated mineral group begins following prospecting. Relevant previous years: ten consecutive previous years beginning with the year of commercial production.
5. Audit and records: Section 35E(6)
For an assessee other than a company or co-operative society, the original section requires the relevant accounts to be audited and the prescribed audit report to be furnished for the first year of the claim. The exact reporting mechanism and filing requirements should be checked against the rules applicable to the relevant assessment year. Retain mineral classifications, approvals, exploration invoices, project records, income calculations and the amortisation schedule.
6. Amalgamation, demerger and no double deduction
Section 35E(7) addresses qualifying amalgamations and transfers the remaining benefit to the amalgamated Indian company subject to conditions. Section 35E(7A) addresses qualifying demergers and the resulting Indian company. Section 35E(8) prohibits a second deduction for the same expenditure under another provision of the 1961 Act.
7. Position under the Income-tax Act, 2025
For tax years beginning on or after 1 April 2026, consult the Income-tax Act, 2025 on the Income Tax Department website and its commencement, repeal, savings and transitional provisions. The continuing treatment of a deduction that began under the 1961 Act should not be inferred solely from the historical wording reproduced below.
8. Practical claim checklist
- Confirm the assessee's status and mineral classification under the Seventh Schedule.
- Identify the first year of commercial production and the preceding four-year spending window.
- Remove site or mineral-right acquisition costs, depreciable capital costs and third-party reimbursements.
- Compute the ten-year instalment and relevant mineral exploitation income each year.
- Track unallowed instalments, restructurings and the prohibition on duplicate deductions.
- Verify current tax-year treatment under the applicable statute and rules.
Original Section 35E text and amendment note
The following statutory wording and amendment note are retained from the original webpage for reference to the Income-tax Act, 1961. Refer to the officially updated law for a particular assessment year.
(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral and incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee shall, in accordance with and subject to the provisions of this section, be allowed for each one of the relevant previous years a deduction of an amount equal to one-tenth of the amount of such expenditure.
(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that sub-section at any time during the year of commercial production and any one or more of the four years immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals :
Provided that there shall be excluded from such expenditure any portion thereof which is met directly or indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by the assessee in respect of any property or rights brought into existence as a result of the expenditure.
(3) Any expenditure-
(i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-section (2) or of any rights in or over such site;
(ii) on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over such deposits; or
(iii) of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of depreciation is admissible under section 32, shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-section (2).
(4) The deduction to be allowed under sub-section (1) for any relevant previous year shall be-
(a) an amount equal to one-tenth of the expenditure specified in sub-section (2) (such one-tenth being hereafter in this sub-section referred to as the instalment); or
(b) such amount as is sufficient to reduce to nil the income (as computed before making the deduction under this section) of that previous year arising from the commercial exploitation whether or not such commercial exploitation is as a result of the operations or development referred to in subsection (2) of any mine or other natural deposit of the mineral or any one or more of the minerals in a group of associated minerals as aforesaid in respect of which the expenditure was incurred, whichever amount is less:
Provided that the amount of the instalment relating to any relevant previous year, to the extent to which it remains unallowed, shall be carried forward and added to the instalment relating to the previous year next following and deemed to be part of that instalment, and so on, for succeeding previous years, so, however, that no part of any instalment shall be carried forward beyond the tenth previous year as reckoned from the year of commercial production.
(5) For the purposes of this section,-
(a) "operation relating to prospecting" means any operation undertaken for the purposes of exploring, locating or proving deposits of any mineral, and includes any such operation which proves to be infructuous or abortive;
(b) "year of commercial production" means the previous year in which as a result of any operation relating to prospecting, commercial production of any mineral or any one or more of the minerals in a group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule, commences;
(c) "relevant previous years" means the ten previous years beginning with the year of commercial production.
(6) Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
(7) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in a scheme of amalgamation-
(i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place.
1 (7A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in a scheme of demerger,-
(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would have applied to the demerged company, if the demerger had not taken place.
(8) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year. --------------------
1. Ins. by 27 of 1999, s. 21 (w.e.f. 1-4-2000).
Frequently asked questions
What does Section 35E allow?
Under the Income-tax Act, 1961, qualifying mineral prospecting and mine-development expenditure is amortised over up to ten relevant previous years, subject to the statutory income ceiling.
Does Section 35E cover all minerals?
No. The minerals or associated mineral groups must be specified in Part A or Part B of the Seventh Schedule to the Income-tax Act, 1961.
Can unused annual instalments be carried forward?
Yes, to succeeding relevant previous years under Section 35E(4), but never beyond the tenth previous year reckoned from the year of commercial production.
Are land acquisition and depreciable machinery costs eligible?
No. Section 35E(3) excludes acquisition of mineral sites or deposits and specified depreciable capital assets.
Can Section 35E be used for tax years from April 2026?
The Income-tax Act, 2025 applies from 1 April 2026. Claims for later tax years, including transitional instalments, must be tested under the new Act and applicable savings or transition provisions rather than assumed to continue unchanged.
Official legal resources
For primary legislation and the statutory mineral schedule, refer to the Income Tax Department, the India Code legislative database, and the Gazette of India. Search for the relevant enactment and assessment-year version before relying on the text.