What is section 35 tax exemption?

Section 35 of the Income Tax Act allows a deduction of 150% of expenses incurred for scientific research. This includes payments to approved entities like National Laboratories, Universities, and IITs for scientific research. The aim is to incentivize companies to invest in scientific research and innovation, enhancing the country's technological capabilities.

What is annual return section 35?

Annual return under Section 35 refers to the mandatory filing of an annual return by specified entities engaged in scientific research. The return should be submitted to the prescribed authority, including relevant details and documents as required. This ensures transparency and compliance with the regulations governing scientific research expenditures.

Who can claim deductions under Section 35?

Deductions under Section 35 can be claimed by businesses, including companies and other entities, that incur expenses on scientific research. These expenses must be directed towards approved in-house research facilities or external scientific research institutions to qualify for the deductions.

What types of expenses are eligible for deduction under Section 35?

Eligible expenses under Section 35 include revenue and capital expenditures on scientific research. This includes salaries of research staff, costs of materials, and payments to approved scientific research institutions. These expenditures must be aimed at fostering scientific research and development.

Are capital expenditures covered under Section 35?

Yes, capital expenditures on scientific research are covered under Section 35. This includes the cost of acquiring land, buildings, machinery, and equipment used exclusively for scientific research. These expenditures can be claimed as deductions to incentivize the development of research infrastructure.

What is the deduction percentage allowed under Section 35?

The deduction percentage allowed under Section 35 varies. Generally, it is 100% for in-house research expenses and 150% for payments to approved external research institutions. This higher deduction rate aims to encourage contributions to scientific research beyond the company's own facilities.

Can Section 35 deductions be claimed for past research expenditures?

No, Section 35 deductions cannot be claimed for past research expenditures. The deductions are only available for current and future expenses incurred on scientific research, ensuring ongoing investment and development in research activities.

What types of research are covered under Section 35?

Section 35 includes multiple types of scientific research, such as basic research, applied research, and experimental development. This research must be conducted in India and must receive approval from the Department of Scientific and Industrial Research (DSIR).

How are capital expenditures treated under Section 35?

Capital expenses related to scientific research, excluding land costs, can be fully deducted in the year they are incurred. If the expenditure occurs before the business begins operations, it can be claimed as expenses in the starting year of the business.

What happens if a research asset is sold?

If an asset used in scientific research is sold, the lower of the asset’s original cost or net sale proceeds will be taxed as business income under Section 41(3). Any amount above the original cost will be subject to capital gains tax.

How can a research project gain approval under Section 35?

To gain approval, the assessee must submit Form 3CK to DSIR, detailing the project, cost estimates, and anticipated benefits. Once approved, the expenses for the research project become eligible for deductions under Section 35.

Section 35 of Income Tax Act - Deductions U/S 35

Section 35 of Income Tax Act

Section 35 of the Income Tax Act offers tax deductions for expenses on scientific research across various fields, including engineering, natural sciences, technology, and social sciences, encouraging innovation and reducing tax burdens for research-focused businesses and institutions.

3 min

26-November-2024

Under Section 35 of the Income Tax Act, expenses related to scientific research are eligible for tax deductions. This provision applies across various fields of science, including engineering, natural sciences, technology, and social sciences. This section is designed to incentivise and support innovation by providing tax benefits for investments in R&D activities. By claiming these deductions, entities can effectively reduce their tax liabilities, making it more financially feasible to engage in research and development efforts.

In this article, we will talk about the key aspects of Section 35, exploring how it benefits taxpayers and the specific types of R&D expenses that are eligible for deductions in the income tax slabs.

What is section 35 of the income tax act?

Section 35 of the Income Tax Act is a provision that allows taxpayers to claim deductions for expenses incurred in scientific research and development. This section aims to promote and support scientific research by providing financial incentives through tax deductions. It encompasses a wide range of scientific fields, including engineering, natural sciences, technology, and social sciences. By enabling deductions for both revenue and capital expenditures related to scientific research, Section 35 helps reduce the overall cost of R&D activities, thus encouraging more investment in innovation and technological advancement.

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Applicability of section 35 of the income tax act

Section 35 applies to all entities involved in scientific research activities, irrespective of their field of study, such as engineering, natural sciences, technology, and social sciences. It is relevant for businesses and individuals who incur expenses related to experimental development, pure research, and applied research. The section extends to both revenue and capital expenditures, facilitating a broad range of scientific activities. The deductions can be claimed for expenses incurred in the year of spending or during the three years preceding the commencement of business activities related to scientific research.

Benefits of section 35

Provides tax deductions: Reduces taxable income by allowing deductions for R&D expenditures, effectively decreasing overall research costs.

Encourages innovation: Motivates companies to invest in developing new products, technologies, and services.

Facilitates economic growth: Boosts productivity and creates job opportunities, contributing positively to economic development.

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Eligibility for deductions under section 35 of the income tax act

Scientific research in India: Research activities must be conducted within India.

Approval by DSIR: The research should be approved by the Department of Scientific and Industrial Research (DSIR).

Purpose of research: Expenditures must be exclusively for scientific research purposes.

Expenditure on scientific research deductible under section 35

1. In-house scientific research & development

Section 35 allows deductions for both revenue and capital expenditures related to in-house scientific research and development. This includes expenses for conducting research activities and purchasing research materials.

2. Revenue expenditure [Section 35(1)(i)]

Revenue expenditures include routine business costs such as salaries, rent, and maintenance directly linked to scientific research. Full deductions are available in the year the expenses are incurred.

3. Capital expenses

Scientific equipment: Deductions for capital expenses on equipment used for scientific research.

Exclusions: Land acquisition costs are not deductible.

Pre-Business expenditures: Capital expenditures incurred up to three years before the business commenced are deductible in the year of commencement.

Asset sales: Proceeds from the sale of scientific research assets, if sold for non-research purposes, are subject to tax adjustments.

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Payment for scientific research work to outside agencies

Section 35 allows taxpayers to claim deductions for payments made to outside agencies engaged in scientific research. This includes payments to institutions such as national laboratories, IITs, and other approved organizations. By facilitating these deductions, Section 35 encourages collaboration between businesses and research institutions, fostering advancements in science and technology.

1. Section 35(1)(ii) & (iia)

Section 35(1)(ii) allows for 100% deductions on payments made to national laboratories, universities, and other recognized research institutions for scientific research. Section 35(1)(iia) extends this benefit to payments made to companies engaged in scientific research, provided they meet specific criteria. These sections ensure that financial contributions towards research are fully deductible, supporting both internal and collaborative research efforts.

2. Section 35(1)(iii)

Section 35(1)(iii) provides for deductions on expenditures related to scientific research, not only within the taxpayer's own organization but also when paid to external research agencies. This section covers a broad spectrum of research activities, including those undertaken in collaboration with approved institutions, thus broadening the scope of deductible expenses.

3. Section 35(1)(iia)

Section 35(1)(iia) offers a 100% deduction for payments made to companies engaged in scientific research, provided these companies are registered and approved by the prescribed authority. This section incentivizes businesses to fund research activities by making such payments fully deductible, thereby supporting innovation and technological advancement.

4. Section 35(2AA)

Section 35(2AA) focuses on deductions for payments made to specified institutions and organizations engaged in scientific research and development. These deductions are available only if the institutions meet the criteria set by the government, ensuring that the funds are used effectively for advancing scientific research.

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Sale of an asset used for scientific research (Section 41(3))

Section 41(3) deals with the tax implications of selling an asset that was used for scientific research. If the asset is sold, the lower of the sale price and the asset’s original cost, which was previously deducted, is treated as business income. Any amount received over the original cost is subject to capital gains tax. This ensures that the tax benefits previously claimed are adjusted in line with the sale of the asset.

1. Sold after being used for business

When a scientific research asset is sold after being used for business purposes, any previously claimed deductions must be adjusted. The sale proceeds, if exceeding the asset’s original cost, are considered business income. The differential amount, reflecting the actual depreciation or use, will be subject to tax, ensuring accurate tax reporting and compliance.

2. Uninvolved capital expenditure

Businesses can deduct their capital investment in scientific research from their earnings, but this deduction is capped at the company’s profit, unlike depreciation. If the profit falls short of the capital expenditure, the excess is termed as unabsorbed capital expenditure on scientific research. According to Section 72(2) (business losses) and Section 73(3) (speculation losses), this unabsorbed amount can be carried forward to subsequent years and deducted from future profits. This process can continue annually until the entire unabsorbed capital expenditure on scientific research is fully adjusted.

3. Procedure for approval

To qualify for deductions under Section 35, a research project must be approved by the designated authority by submitting Form 3CK, which includes details of the project's specifications, estimated costs, and expected benefits. The deduction amount depends on the type of expenditure: revenue expenses can be fully written off in the year they are incurred, while capital expenses are deductible over time through depreciation. Accurate records, such as invoices, bills, vouchers, and other supporting documents, must be maintained to claim the deduction.

4. Denial of deductions

Deductions under Section 35 of the Income Tax Act cannot be denied for payments made to a National Laboratory, University, Indian Institute of Technology, or specified person solely because their approval was later withdrawn, whether due to issues with the institution or the discontinuation of their program. To claim this deduction, Form 3CK must be submitted to the DSIR, along with accurate records and documentation, such as invoices, bills, and vouchers, when filing tax returns.

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Conclusion

Section 35 of the Income Tax Act offers significant tax benefits for scientific research expenditures, supporting both in-house and collaborative research activities. By understanding the applicability, benefits, and procedures for claiming deductions, businesses and individuals can effectively reduce their tax liabilities and promote innovation. Ensure compliance with all requirements and maintain accurate documentation to maximize the advantages of Section 35.

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