Press / to search
Rule 40Published

Rule 40: Skill development project conditions

Rule 40 sets continuing conditions and definitions for notified skill development projects. It covers separate audited accounts, the employee-training timing test, eligible expenditure and annual reporting.

Official notified Income-tax Rules, 2026

Need advice on Rule 40?

This article is for general information. Read the official Rules and applicable Act amendments, including the Taxation and Other Laws (Amendment) Act, 2026. If you need professional advice for your situation, contact Bizeneed.

Contact us
On this page

Bare law

Rule 40 - Conditions subject to which a skill development project is to be notified under section 47(1)(b)

(1) The company undertaking a skill development project (herein referred as the project) shall maintain separate books of account for the project notified under section 47(1)(b) and get such books of account audited by an accountant as defined in section 515(3)(b).

(2) The audit report referred to in sub-rule (1) shall include the comments of the auditor on the true and fair view of the books of account maintained for the project, the genuineness of the activities of the project, and the fulfilment of the conditions specified in the relevant provisions of the Act, rules, or the conditions mentioned in a notification issued under rule 39.

(3) A project in respect of existing employees of the company shall not be eligible for notification under section 47(1)(b), where the training of such employees commences after six months of their recruitment.

(4) The expenses, eligible for deduction under section 47(1)(b), shall be all expenses incurred wholly and exclusively for undertaking an eligible project as reduced by– (a) the cost of any land or building; and (b) any expenditure on the project that is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly.

(5) The company shall, on or before the due date of furnishing the return of income under section 263(1), furnish the audited statement of accounts of the project for the tax year along with the audit report and the amount of deduction claimed under section 47(1)(b), to the Commissioner of Income-tax having jurisdiction over the company.

(6) If it is found by the Commissioner of Income-tax that— (a) the company has not maintained separate books of account for the project or has not got such books of account audited by an accountant in accordance with sub-rule (1); or (b) the company has not furnished the documents referred to in sub-rule (5); or (c) the company has ceased to carry out activities of the project; or (d) the activities of the project of the company are not genuine; or (e) the activities of the project of the company are not being carried out in accordance with the relevant provisions of the Act, rules, or the conditions subject to which the notification was issued under rule 39, he shall, after making appropriate inquiries, furnish a report on the circumstances referred to in clauses (a) to (e) to the Board for appropriate action under rule 39(14).

(7) If the National Council for Vocational Education and Training is not satisfied about the genuineness of the activities of the notified project, it shall send its recommendation to the Board for appropriate action under rule 39(14).

(8) For the purposes of this rule and rule 39,– (a)"eligible company" means a company, which is- (i) engaged in the business of manufacture or production of any article or thing, not being an article or thing mentioned at serial numbers 1 and 2 of the list of articles or things specified in the Thirteenth Schedule; or (ii) engaged in providing the following services: 1. accounting services; 2. architect services; 3. automobile repair or maintenance; 4. banking, insurance and financial services including ATM installation, maintenance and operations or banking correspondents or insurance agents; 5. beauty and cosmetology, including hair styling or manicurists or pedicurists; 6. cable operators or Direct To Home (DTH) services; 7. cargo Handling and stevedoring services; 8. construction including painting or woodwork or plumbing or flooring or electrical wiring or installation or maintenance of lifts; 9. courier services; 10. design services including fashion or gems and jewellery or apparel or industrial designing; 11. event management; 12. facilities management, housekeeping, cleaning services; 13. fire and safety services; 14. food processing or preservation services, including post harvesting and post farm-gate skills; 15. health and Wellness services including spa or nutritionists or weight management or health instructors or yoga or gym trainers; 16. home decor services, landscaping; 17. hospital and Healthcare services, such as Lab technicians, nursing and other paramedical staff; 18. hospitality, including culinary skills or catering services; 19. logistics and Transportation by any mode, including by air, sea, road, rail or pipelines, and related services such as driving or operation of heavy machinery equipment, forwarding agents, packers and movers; 20. market research services; 21. media or film or advertising; 22. mining and extraction of mineral resources, including hydrocarbons; 23. packaging and warehousing, including both ambient temperature storage and cold storage, operation of internal container depots and container freight stations; 24. port and maritime services such as dredging, piloting, tug boat operations, shipbuilding, ship scrapping and bunkering; 25. power sector services, including those required for erection or installation or maintenance of equipment or towers, etc. in generation, transmission or distribution sector projects; 26. private security, including guards, supervisors, installation and maintenance of security equipment etc.; 27. refrigeration and air-conditioning; 28. repair and maintenance services, including installation and servicing of household goods or white goods; 29. retail marketing, including shop floor assistants or merchandisers; 30. telecom services, including erection and maintenance of towers; and 31. travel and tourism, including guides or ticketing or sales or cab drives; (b) ―National Council for Vocational Education and Training‖ means the National Council constituted by the Ministry of Skill Development and Entrepreneurship vide Notification No. SD-17/113/2017-E&PW dated 05.12.2018; (c) ―State Council for Vocational Training" means a State Council for Training in Vocational Trades established by a State Government; and (d) "training institute" means a training institute– (i)set up by the Central Government or a State Government or a local authority; (ii)affiliated to a State Council for Vocational Training; (iii)affiliated to, or approved by, or empanelled by, the National Council for Vocational Education and Training; (iv)affiliated to, or approved by, or empanelled by, the Central Government and certified by the National Council for Vocational Education and Training as having training standards equivalent to training institutes affiliated to the National Council for Vocational Education and Training; or (v)affiliated to, or approved by or empanelled by, the State Government and certified by the National Council for Vocational Education and Training or a State Council for Vocational Training as having training standards equivalent to training institutes affiliated to the National Council for Vocational Education and Training or, as the case may be, the State Council for Vocational Training.

Rule breakdown

Check the eligible-company definition

Sub-rule (8) covers the stated manufacturing or production companies, subject to the listed exclusions, and companies providing one of the 31 specified service categories.

Match the actual business to the statutory category. The list includes accounting, construction, healthcare, logistics and other stated services, but should not be summarised as every service business.

Use a qualifying training institute

The definition identifies government-set-up institutes and the stated affiliation, approval, empanelment and certification routes involving the State Council or National Council. Some routes require certification of equivalent training standards.

Keep the particular affiliation or approval and any required certification. A private institute’s name or accreditation in an unrelated scheme does not automatically demonstrate the definition.

Check when existing employees start training

A project for existing employees is not eligible where their training commences after six months of recruitment. Record recruitment dates and actual training commencement for those employees.

This is a training-start condition. Do not substitute the application date or assume that making a payment within six months answers it.

Maintain separate accounts and a complete audit report

The company must keep separate books for the notified project and have them audited by the defined accountant. The audit report must comment on the true and fair view, genuineness of activities and fulfilment of the relevant conditions.

Reconcile the project ledger and supporting records to the audit and deduction computation rather than relying only on the company’s overall financial statements.

Reduce excluded and reimbursable expenditure

Eligible expenses must be wholly and exclusively for the project and reduced by land or building cost and expenditure reimbursed or reimbursable by any person directly or indirectly.

Hypothetical: a project has ₹30 lakh of otherwise relevant expenses, including ₹4 lakh of building cost and a separate ₹6 lakh reimbursable amount. With no overlap, ₹20 lakh remains before applying all other Act and notification conditions.

Annual submission and adverse reports

By the section 263(1) return due date, furnish the audited project accounts, audit report and claimed deduction amount to the jurisdictional Commissioner.

After appropriate inquiry into listed failures, the Commissioner must report to the Board for action under Rule 39(14). The Council must also send its recommendation if not satisfied about genuineness. Keep activity evidence and compliance records throughout the notified period.

Key takeaways

Defined company and institute

Both eligibility definitions must be checked.

Training start matters

The existing-employee test concerns commencement after six months of recruitment.

Net eligible expenses

Land/building and reimbursed or reimbursable expenditure are excluded.

Separate project compliance

Accounts, audit and annual submissions remain required.

Practical checklist

  • Match company and institute facts to the definitions.
  • Record recruitment and training-start dates.
  • Keep project-specific accounts and audit evidence.
  • Reconcile cost exclusions and the annual submission.

Avoid

  • Do not replace training commencement with the application date.
  • Do not include land/building or reimbursable expenditure.

FAQs

Does the six-month condition refer to the approval application?

No. Sub-rule (3) refers to when training of existing employees commences after their recruitment.

Can reimbursable expenditure be included until cash is received?

The rule excludes reimbursed or reimbursable expenditure, including indirect reimbursement.

Does the service-company definition cover every service?

No. Sub-rule (8)(a)(ii) lists the qualifying service categories.

Can a general corporate audit replace the project books?

The rule separately requires project books and the stated audit of those books.

Glossary

Eligible company
A company falling within the manufacturing/production or specified-services definition in sub-rule (8)(a).
Training institute
An institute meeting one of the specified status, affiliation or approval routes in sub-rule (8)(d).

Official sources