Section 35AD of the Income Tax Act allows taxpayers to claim deductions for specific types of capital expenditure reserved for specified businesses during any financial year. The expenditure must fulfill the criteria mentioned in this section. This section specifies that a taxpayer is eligible for a deduction for all capital expenditures incurred solely for their business operations during the previous year in which the expenditures were made. Section 35AD also permits deductions for certain expenses incurred by a specified business.

Conditions for Claiming Deductions Under Section 35AD

1. The deduction under Section 35AD is applicable only if the taxpayer opts to file under the old tax regime.
2. The business must be established and registered in India.
3. The business must have entered into a legal agreement to develop, manage, operate, or maintain the existing infrastructure with a statutory organization, a state government, a local authority, or the central government.
4. A business can’t claim deductions for expenses incurred towards the purchase of land/financial instruments/goodwill.
5. Deductions cannot be claimed for payments exceeding INR ₹10,000 made to a person in a single day when such payments are made in cash, by crossed cheque, or by bearer cheque.
6. The deduction is allowed only if the assessee’s accounts have been audited by a chartered accountant and the audit report is furnished along with the Income tax return.
7. Any asset for which a deduction is claimed and allowed under Section 35AD must be used exclusively for the specified business for at least eight years.

Deduction Amount Under Section 35AD

A deduction of 100% of the capital expenditure incurred during the previous year, wholly and exclusively for the specified business, is allowed under Section 35AD. However, expenditure incurred on the acquisition of land, goodwill, or financial instruments would not be eligible for deduction. Further, capital expenditure incurred wholly and exclusively for the specified business before the commencement of operations is allowed as a deduction in the previous year in which the assessee begins the specified business.

Set-off or Carry Forward of Loss from Specified Business

The loss of an assessee claiming a deduction under Section 35AD for a specified business can be set off only against the profits of another specified business. Losses from a specified business can be carried forward indefinitely to be set off against profits from the same or any other specified business, provided the Income tax return is filed before the due date.

Benefits of Claiming Deduction under Section 35AD

The primary benefit of claiming a deduction under Section 35AD of the Income Tax Act, 1961, is a 100% deduction on qualifying capital expenditure in the year the expense is incurred.

This offers significant tax relief compared to standard depreciation, which spreads the deduction over several years. 

Section 35AD includes immediate tax savings, enhanced cash flow, and the incentivization of infrastructure investment in critical sectors.

Limitations and Restrictions of Section 35AD

1. The deduction is only applicable to specific government-approved businesses and excludes expenditures like land, goodwill, or financial instruments.
2. There are restrictions on using second-hand assets, generally allowing only up to 20% of the total value of plant and machinery to consist of used assets.
3. The business cannot be formed through the splitting or reconstruction of an existing business.
4. Assets must be used exclusively for the specified business for at least eight years, or the deduction may be reversed.
5. Losses from a specified business can only be set off against profits of another specified business and cannot be adjusted against other income sources.
6. Loss carry-forward is indefinite but contingent on the timely filing of the income tax return.
7. Claiming a deduction under Section 35AD prevents claiming depreciation or other profit-linked deductions for the same assets.
8. Cash payments exceeding INR ₹10,000 for expenditures are generally not allowed.
9. A mandatory audit by a Chartered Accountant is required, with the report submitted with the tax return.
10. The deduction is optional and typically requires opting for the old income tax regime. 

Due date for Section 35AD of the Income Tax Act

The deduction under Section 35AD does not have a separate due date; it is claimed as part of the regular Income Tax Return (ITR) filing process. The due date for claiming this deduction is, therefore, the same as the due date for filing your ITR for the relevant assessment year, which depends on your taxpayer category. 

General Due Dates for ITR Filing (Assessment Year 2025-26, corresponding to Financial Year 2024-25)

The standard due dates are:

1. For individuals/HUFs (not requiring an audit): July 31, 2025. This date was recently extended to September 16, 2025, for AY 2025-26.
2. For companies and assessees requiring a tax audit: October 31, 2025. This date was recently extended to December 10, 2025, for AY 2025-26.
3. For assessees requiring a Transfer Pricing report (Form 3CEB): November 30, 2025. 

Conclusion

Section 35AD of the Income Tax Act was introduced to support the development of new sectors in India. Full capital spending can be reduced from business profits. However, this benefit is available only when the prescribed conditions are met, the old regime is chosen, the audit is completed, and the assets are used for eight years. Land, goodwill, and cash limits are not allowed. With the right planning, tax savings can be big. From warehousing to hotels to hospitals, many new industries can grow by using Section 35AD of the Income Tax Act.

For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com

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