Chapter IV - Computation of Total Income
Section 44
Section 44: amortisation of preliminary expenses
Section 44 allows an Indian company, or any other resident person, to spread ("amortise") certain specified preliminary expenses - incurred either before a business commences or in connection with extending an existing undertaking or setting up a new unit - over five successive tax years, subject to a cap.
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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) If an assessee, being an Indian company or a person (other than a company), who is resident in India, incurs any expenditure specified in sub-section (2)— (a) before the commencement of its business; or (b) after the commencement of its business, in connection with the extension of its undertaking or in connection with its setting up a new unit, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive tax years beginning with— (i) the tax year in which the business commences, for clause (a); or (ii) the tax year in which the extension of the undertaking is completed or the new unit commences production or operation, for clause (b).
(2) The expenditure referred to in sub-section (1) shall be— (a) the expenditure in connection with— (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business; (iv) engineering services relating to the business; (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business; (c) in addition to expenditure in clauses (a) and (b), if the assessee is a company,— (i) legal charges for drafting and printing of the Memorandum and Articles of Association of the company; (ii) fees for registering the company under the provisions of the Companies Act, 2013; (iii) expenditure in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; and (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act), as may be prescribed.
(3) In relation to expenditure specified in sub-section (2)(a), the assessee shall furnish a statement containing the particulars of the expenditure in such form and manner, as may be prescribed.
(4) The allowable deduction under sub-section (1) in respect of aggregate of expenditure referred to in sub-section (2) shall be restricted to 5%— (a) of the cost of the project; or (b) of the capital employed in the business of the company, where the assessee is an Indian company, at its option.
(5) For the purposes of this section,— (a) “cost of the project” means the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings) and— (i) for cases under sub-section (1)(a), the actual cost as shown in the books of the assessee as on the last day of the tax year in which the business commences; (ii) for cases under sub-section (1)(b), the actual cost as shown in the books of the assessee as on the last day of the tax year in which either the extension of the undertaking is completed, or the new unit commences production or operations, as the case may be, in so far as such fixed assets have been acquired or developed in connection with the extension of the undertaking or setting up of new unit; (b) “capital employed in the business of the company” means— (i) in cases under sub-section (1)(a), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the tax year in which the business of the company commences; (ii) in a case under sub-section (1)(b), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the tax year in which the extension of the undertaking is completed or, as the case may be, the new unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the undertaking or the setting up of the new unit of the company; (c) “long-term borrowings” means— (i) any moneys borrowed by the company from Government or Industrial Finance Corporation of India Limited or any other financial institution which is eligible for deduction under section 32(e) or any banking institution (not being a financial institution referred to above); or (ii) any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the tenure of moneys borrowed or debt is not less than seven years.
(6) If the assessee is a person, other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless,— (a) 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 before the specified date referred to in section 63; and (b) the assessee furnishes for the first year in which the deduction under this section is claimed, the report of such audit by such date in such form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed.
(7) If an undertaking of Indian company entitled for deduction under sub-section (1) is transferred before expiry of five years specified in the said sub-section, in a scheme of amalgamation, to another Indian company, then— (a) no deduction under sub-section (1) shall be allowed to the amalgamating company for the tax year in which amalgamation takes place; and (b) all provisions of this section shall continue to apply to the amalgamated company as they would have applied to the amalgamating company, as if the amalgamation had not taken place.
(8) If an undertaking of Indian company entitled for deduction under sub-section (1) is transferred before five years specified in the said sub-section, in a scheme of demerger to another company, then— (a) no deduction under sub-section (1) shall be allowed to the demerged company for the tax year in which demerger takes place; and (b) all provisions of this section shall continue to apply to the resulting company as they would have applied to the demerged company, as if the demerger had not taken place.
(9) If a deduction under this section is claimed and allowed for any tax year in respect of any expenditure referred to in sub-section (2), deduction shall not be allowed for such expenditure under any other provision of this Act for the same or any other tax year.
Introduction
Qualifying preliminary expenses are spread across five tax years rather than deducted in full at once. The eligible person, timing, expense category, ceiling and successor rules all matter.
Key takeaways
Preliminary expenses
Qualifying expenditure before business commencement, or for extension or a new unit, may be amortised in five equal yearly instalments starting from the relevant tax year.
Eligible taxpayer and spend
The allowance applies to an Indian company or a resident non-company taxpayer only for the categories and limits specified in the section.
Who can claim, and over what period
Section 44(1) allows an Indian company, or a resident person other than a company, to deduct one-fifth of the specified expenditure in each of five successive tax years, starting from the year the business commences (for pre-business expenditure) or the year the extension/new unit is completed and commences production/operation (for expansion expenditure).
What expenditure qualifies
Section 44(2) lists the qualifying expenditure:
- Preparation of a feasibility report, project report, market survey or other necessary survey, and engineering services relating to the business.
- Legal charges for drafting agreements relating to setting up or conducting the business.
- For companies specifically: legal charges for drafting/printing the Memorandum and Articles of Association, company registration fees under the Companies Act, 2013, and expenditure on issuing shares/debentures to the public (underwriting commission, brokerage, and drafting/typing/printing/advertising the prospectus).
- Any other prescribed items of expenditure not otherwise eligible for deduction under the Act.
The 5% ceiling
Section 44(4) caps the allowable deduction at 5% of the "cost of the project", or, at the option of an Indian company, 5% of the "capital employed in the business of the company" - both terms are defined in Section 44(5) with reference to fixed assets and issued share capital/debentures/long-term borrowings as on the relevant date.
Audit requirement for non-corporate assessees
Section 44(6) requires that, for an assessee other than a company or co-operative society, the accounts for the year(s) the expenditure was incurred must be audited by an accountant before the specified date under Section 63, and the audit report must be furnished in the prescribed form for the first year the deduction is claimed.
Amalgamation and demerger continuity
If an Indian company's undertaking (entitled to this deduction) is transferred in a scheme of amalgamation or demerger before the five-year period expires, no deduction is allowed to the amalgamating/demerged company for the transfer year, and the provisions continue to apply to the amalgamated/resulting company as if the reorganisation had not occurred (Section 44(7) and (8)).
Section 44(9) confirms that once a deduction is claimed and allowed under this section for a given expenditure, no deduction for the same expenditure can be claimed under any other provision of the Act.
Step-by-step flow for applying Section 44
- 1
Is the assessee an Indian company or a resident non-company person?
- No: Section 44 is not available.
- Yes: Go to the next step.
- 2
When was the expenditure incurred?
- Before business commenced: Amortisation starts in the tax year the business commences.
- After commencement, for extension or a new unit: Amortisation starts in the year the extension is completed or the new unit starts production or operation.
- 3
Is it a qualifying item under Section 44(2)?
Feasibility and project reports, market or other surveys, engineering services, legal charges for business agreements, and for companies also MoA/AoA drafting, ROC registration fees and public issue costs, plus prescribed items.
- 4
Apply the 5% cap
Aggregate qualifying expenditure is capped at 5% of the cost of the project, or, for an Indian company at its option, 5% of capital employed.
- 5
Claim one-fifth each year for five successive tax years
File the prescribed statement for clause (2)(a) items, and meet any audit condition that applies to non-corporate assessees.
Practical checklist
Do
- List each qualifying pre-commencement or expansion expense and its supporting invoice.
- Apply the statutory ceiling and five-year instalment schedule from the correct start year.
- For a transferred undertaking, document the remaining instalments and successor eligibility.
Avoid
- Do not include ordinary post-commencement costs in the preliminary-expense base without a qualifying expansion or new-unit route.
- Do not claim all five instalments in the first year.
Illustrative example
Worked example: start-up company's preliminary costs
Hypothetical facts (illustration only, not a real taxpayer): A newly incorporated Indian company spends ₹4 lakh on ROC registration fees and MoA/AoA drafting, and ₹6 lakh on a project report, before starting business. The cost of its project (fixed assets as defined) is ₹1.5 crore.
Eligibility
It is an Indian company and the costs fall in Section 44(2)(a) and (c).
Cap
5% of ₹1.5 crore is ₹7.5 lakh. Qualifying expenditure is ₹10 lakh, so only ₹7.5 lakh can be amortised (unless the capital-employed option gives a higher base).
Annual deduction
One-fifth of ₹7.5 lakh = ₹1.5 lakh a year for five years, starting with the tax year the business commences.
Outcome
- ₹1.5 lakh is deductible each year for five years.
- The ₹2.5 lakh above the cap is not deductible under Section 44.
Glossary
- Amortisation
- Spreading an eligible expense as deductions over the years fixed by statute.
- Preliminary expenditure
- The specified business-formation or expansion expenditure eligible under Section 44, subject to its limits.
Frequently asked questions
Over how many years can preliminary expenses be amortised?
Five successive tax years, at one-fifth of the qualifying expenditure per year, starting from the year the business commences (or, for expansion expenditure, the year the extension/new unit is completed).
Is there a cap on how much preliminary expenditure can be deducted?
Yes - the total qualifying expenditure eligible for this amortisation is capped at 5% of the "cost of the project", or, at an Indian company's option, 5% of the "capital employed in the business of the company".
Do non-corporate businesses need an audit to claim this deduction?
Yes - under Section 44(6), an assessee other than a company or co-operative society must have its accounts audited by an accountant before the specified date, and furnish the audit report for the first year the deduction is claimed.
Need help applying this provision to your situation?
Plan your preliminary expense amortisation with our tax teamLast updated 10 October 2026