Identify what was borrowed and when the asset first entered use
For FY 2025–26 and AY 2026–27, the proviso to section 36(1)(iii) of the Income-tax Act, 1961 denies current deduction for acquisition borrowing interest for the specified period from borrowing until the asset is first put to use. Book capitalisation does not decide whether the bar applies. Establish the actual deployment of funds and substantiate first use before computing the restricted amount.
Read the applicable text: Income-tax Act, 1961: Sections 32, 36, 43 and 43B; CBDT Notification 87/2016: ICDS IX, Borrowing Costs; Income Tax Department: AY 2026–27 transition and applicable return law.
Create a timeline for each asset
Match loan terms and drawdowns to purchase, installation and commissioning records. Delivery, accounting readiness and actual operational use can occur on different dates. For a staged project, identify the assets and use events individually rather than picking one date for all invoices. Mixed-purpose funding needs an evidence-based allocation. Where the lender charges interest for a period straddling first use, preserve the contract and calculation supporting the cut-off.
Reconcile tax cost and current deduction separately
Apply the actual-cost rules and, where the notified ICDS apply, ICDS IX. Its preamble makes the Act controlling in a conflict. The notification generally applies to mercantile-system taxpayers computing business, professional or other-source income, except individuals and HUFs not required to obtain a Section 44AB audit. For a qualifying asset, specific borrowing costs are measured under paragraph 5, with capitalisation beginning on borrowing and ceasing on first use for tangible or intangible assets of the specified kind. General borrowings use the paragraph 6 allocation and begin when the funds are used; do not apply the specific-loan formula to a common pool. Explanation 8 to section 43(1) excludes acquisition interest relating to periods after first use from actual cost. The interest blocked as a current deduction is not automatically an eligible tax-cost addition. Separately consider business purpose and Section 43B actual-payment conditions for interest payable to lenders covered by that section. For other fact patterns, the tax treatment of an asset held ready for use can depend on the relevant authority; an accounting readiness date or register entry is insufficient on its own.
Avoid counting the same amount twice
Reverse restricted interest in the tax computation only to the extent it reduced book profit. If the amount is already in book asset cost, verify the tax basis without an additional profit and loss add-back. Review post-use interest capitalised in the books separately. Reconcile tax depreciation from the supported tax asset base and retain the first-use evidence.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Four pre-use months
A ₹50 lakh dedicated machinery loan at 12% simple annual interest runs for four whole months before first use. Interest is ₹2 lakh. If expensed, that amount is reversed in the tax computation under the stated assumptions.
Illustrative example 2: Two interest tranches
Statements separately show ₹1.20 lakh wholly before first use and ₹0.80 lakh wholly after. Of ₹2 lakh expensed, ₹1.20 lakh is restricted and ₹0.80 lakh proceeds to the ordinary deduction checks.
Illustrative example 3: Capitalised in the books
₹1.40 lakh pre-use interest is in asset cost and ₹0.60 lakh post-use interest is expensed. The ₹1.40 lakh requires zero profit and loss add-back; check the eligible tax-cost amount independently.
Illustrative example 4: Two machines
Supported restricted interest is ₹0.90 lakh for A and ₹0.45 lakh for B. If both are expensed, the add-back is ₹1.35 lakh. Keep the two asset allocations traceable.
Illustrative example 5: Post-use interest in asset cost
Book asset cost of ₹34 lakh includes ₹1 lakh wholly after first use. Assuming the other components are accepted, the adjusted cost is ₹33 lakh before any other adjustments. Test the ₹1 lakh for current deduction separately.
Illustrative example 6: Uncommissioned at close
A ₹24 lakh specific loan at 10% simple annual interest accrues for six months, all before use. ₹1.20 lakh is restricted if expensed. An entry in the asset register alone does not establish depreciation eligibility. Check Section 32 separately, including the use requirement and, for an asset acquired during the year and put to use for fewer than 180 days, the applicable restriction on first-year depreciation.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the acquisition | Purchase and installation file by asset ID. |
| 2 | Trace funding | Loan agreement, bank statement and drawdowns. |
| 3 | Check rate and period | Lender statement and calculation. |
| 4 | Evidence first use | Commissioning and actual operational records. |
| 5 | Split interest by asset and period | Pre-use and post-use tranches with rationale. |
| 6 | Trace the book debit | Profit and loss, work in progress or asset register. |
| 7 | Determine eligible tax capitalisation | ICDS IX and actual-cost calculation. |
| 8 | Screen other deduction rules | Payment and other conditions where applicable. |
| 9 | Reconcile tax depreciation | First-use and tax base support. |
| 10 | Approve the adjustment | Check expense and cost for overlap. |
Sixteen practitioner FAQs
1. Does expensing override the proviso?
No. It applies whether or not the interest was capitalised in the books.
2. Can delivery prove first use on its own?
Check operational evidence rather than relying only on delivery.
3. How is staged commissioning handled?
Support the use date of each identifiable asset.
4. Does every working-capital loan fall within the proviso?
Trace whether capital was borrowed for the acquisition.
5. Is a sanction amount enough for allocation?
Also trace drawdowns and actual deployment.
6. Does all denied interest enter tax cost?
No. Apply ICDS IX and the actual-cost rules separately.
7. What does Explanation 8 exclude?
Acquisition interest relatable to periods after first use.
8. Is post-use interest automatically deductible?
No. Apply the ordinary conditions and other applicable restrictions.
9. Can an already capitalised amount require a profit and loss add-back?
Only amounts actually deducted from book profit belong in that reversal.
10. Can one loan fund two machines?
Yes. Keep supported allocations and dates per asset.
11. Do work-in-progress labels settle the date?
No. Use actual evidence.
12. Does accounting readiness equal first use?
They can differ; apply the tax test.
13. Can the same interest be deducted and retained in tax cost?
No. Trace it through both workings.
14. What if section 43B is relevant?
Review actual payment and the applicable statutory conditions separately.
15. Which Act applies to this example year?
The 1961 Act applies to FY 2025–26 and AY 2026–27.
16. What is the final review document?
A loan-to-asset bridge reconciling interest, book entries and tax cost.