Chapter XVI - Procedure for Assessment
Section 277
Section 277: method of accounting in certain cases
Section 277 supplements Section 276 by fixing the valuation rules for inventory, purchases and sales, and securities when computing income under "Profits and gains of business or profession" - all tied back to the income computation and disclosure standards (ICDS) notified under Section 276(2).
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) For the purposes of determining the income chargeable under the head “Profits and gains of business or profession”,—
(i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed as per the income computation and disclosure standards notified under section 276(2);
(ii) the valuation of purchase and sale of goods or services and valuation of inventory shall be adjusted to include any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation;
(iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised as per the income computation and disclosure standards notified under section 276(2);
(iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value as per the income computation and disclosure standards notified under section 276(2).
(2) For the purposes of sub-section (1), the inventory being securities held by a scheduled bank or public financial institution shall be valued as per the income computation and disclosure standards notified under section 276(2) after taking into account the extant guidelines issued by the Reserve Bank of India in this regard.
(3) For the purposes of sub-sections (1) and (2), the comparison of actual cost and net realisable value of securities shall be made category-wise.
(4) For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law in force, shall include all such payment irrespective of any right arising as a consequence to such payment.
(5) For the purposes of this section, “public financial institution” shall have the same meaning as assigned to it in section 2(72) of the Companies Act, 2013.
Introduction
The section separates ordinary inventory from different kinds of securities held as inventory. It also requires the listed taxes, duties, cesses and fees to be included in specified valuations when actually paid or incurred to bring goods or services to their location and condition.
Key takeaways
Ordinary inventory: lower value
Inventory is generally valued at the lower of actual cost and net realisable value under the applicable notified standards.
Securities need separate classification
Unlisted or irregularly quoted securities held as inventory use initially recognised actual cost; other securities inventory uses the lower-of-cost-or-net-realisable-value rule.
Tax and duty may enter valuation
Purchase, sale and inventory valuation is adjusted for tax, duty, cess or fee actually paid or incurred to bring goods or services to the relevant location and condition.
Bank holdings have an extra reference
Securities inventory of a scheduled bank or public financial institution is valued under notified standards after taking current RBI guidelines into account.
Valuation rules for inventory, goods/services and securities
For computing income under "Profits and gains of business or profession":
- Inventory is valued at the lower of actual cost or net realisable value, computed as per the ICDS notified under section 276(2).
- Valuation of purchase and sale of goods or services, and of inventory, must be adjusted to include any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to their place of location and condition as on the valuation date.
- Inventory that is securities not listed on a recognised stock exchange, or listed but not regularly quoted, is valued at actual cost initially recognised as per the notified ICDS.
- Inventory that is other securities is valued at the lower of actual cost or net realisable value as per the notified ICDS.
Securities held by banks and financial institutions
Inventory that is securities held by a scheduled bank or a public financial institution is valued as per the notified ICDS, after taking into account the extant guidelines issued by the Reserve Bank of India in this regard.
The comparison of actual cost and net realisable value of securities under sub-sections (1) and (2) must be made category-wise.
Definitions
Any tax, duty, cess or fee under any law in force includes all such payments, irrespective of any right arising as a consequence of the payment.
"Public financial institution" has the same meaning as in section 2(72) of the Companies Act, 2013.
Step-by-step flow for valuing inventory under Section 277
- 1
Is the income being determined under "Profits and gains of business or profession"?
- No: Section 277 does not apply.
- Yes: Go to the next step.
- 2
Is the inventory made up of securities?
- No: Value it at the lower of actual cost or net realisable value as per the standards notified under section 276(2) (Section 277(1)(i)). Skip to step 5.
- Yes: Go to the next step.
- 3
Are the securities held by a scheduled bank or a public financial institution?
"Public financial institution" has the meaning in section 2(72) of the Companies Act, 2013 (Section 277(5)).
- Yes: Value them as per the notified standards, taking into account the extant Reserve Bank of India guidelines (Section 277(2)). Skip to step 5.
- No: Go to the next step.
- 4
Are the securities unlisted, or listed but not regularly quoted?
Such securities are valued at actual cost initially recognised as per the notified standards (Section 277(1)(iii)). Other securities are valued at the lower of actual cost or net realisable value (Section 277(1)(iv)). Cost and net realisable value are compared category-wise (Section 277(3)).
- 5
Adjust for taxes, duties, cess and fees
Purchases, sales and inventory include any tax, duty, cess or fee actually paid or incurred to bring the goods or services to their location and condition on the valuation date (Section 277(1)(ii)), even if a right arises from the payment (Section 277(4)).
Practical checklist
Do
- Value inventory and other covered items using the method prescribed for that item.
- Document the securities classification where banking or financial-institution rules apply.
Avoid
- Assume one closing-stock valuation method covers every class of inventory and security.
Illustrative example
Worked example: category-wise valuation of a share trader's inventory
Hypothetical facts (illustration only, not a real taxpayer): A share-trading firm (not a bank or public financial institution) holds at year end: listed, regularly quoted shares X (cost ₹6,00,000; net realisable value ₹4,50,000) and Y (cost ₹4,00,000; net realisable value ₹4,80,000), assumed to be in the same category; and unlisted shares Z with an actual cost initially recognised of ₹5,00,000. All figures are assumed for illustration.
Quoted shares, category-wise
Category cost = ₹6,00,000 + ₹4,00,000 = ₹10,00,000. Category net realisable value = ₹4,50,000 + ₹4,80,000 = ₹9,30,000. The lower figure, ₹9,30,000, is used (Sections 277(1)(iv) and (3)).
Why not scrip-wise
Scrip-wise, the lower values would give ₹4,50,000 + ₹4,00,000 = ₹8,50,000. Section 277(3) requires the category-wise comparison instead.
Unlisted shares
Z is valued at the actual cost initially recognised: ₹5,00,000 (Section 277(1)(iii)).
Closing inventory
₹9,30,000 + ₹5,00,000 = ₹14,30,000, subject to the detailed rules in the notified standards.
Outcome
- Closing inventory of securities is ₹14,30,000.
- How securities are grouped into categories depends on the notified standards, which Section 277 does not set out.
Frequently asked questions
How is inventory valued under Section 277?
At the lower of actual cost or net realisable value, computed as per the income computation and disclosure standards notified under section 276(2).
Does the valuation include taxes and duties paid on goods?
Yes - valuation of purchase and sale of goods or services, and of inventory, must be adjusted to include any tax, duty, cess or fee actually paid or incurred to bring the goods or services to their location and condition as on the valuation date.
How are unlisted securities valued as inventory?
Securities not listed on a recognised stock exchange, or listed but not regularly quoted, are valued at their actual cost initially recognised, as per the notified ICDS - not at net realisable value.
Need help applying this provision to your situation?
Get help with inventory and securities valuation for your accountsLast updated 9 October 2026