Classify the receipt before reducing tax cost
For FY 2025–26 and AY 2026–27, Explanation 10 to section 43(1) of the Income-tax Act, 1961 excludes from an acquired asset’s actual cost the portion met by a subsidy, grant or reimbursement. The provision can apply to amounts met directly or indirectly by the specified government, authority or another person. Trace whether the assistance actually meets asset cost. A financial statement label, the payer’s name, or the mere existence of a scheme does not answer the statutory question.
Read the applicable text: Income-tax Act, 1961: section 2(24)(xviii) and Explanation 10 to section 43(1) CBDT: notified ITR-6 for AY 2026–27.
Use only the supported grant asset pool
Where assistance cannot be directly related to one acquired asset, the proviso apportions the common amount by the proportion the particular asset bears to all assets in respect of or with reference to which the assistance is received. Build a cost schedule for the covered assets. In these examples, allocate the common amount in proportion to the acquisition costs of the covered assets, excluding unrelated assets. First identify genuinely direct grant amounts and then allocate only the residual common grant on its supported facts. Reconcile the sum allocated to the amount under review before carrying adjusted cost into the relevant tax block.
Reconcile income and depreciation separately
For assistance within section 2(24)(xviii), sub-clause (a) excludes the subsidy, grant or reimbursement taken into account in determining actual cost under Explanation 10. The income clause and the actual-cost provision do not have identical lists of payers, so test each separately. Document the exclusion for the supported amount and review any balance independently. Book treatment may differ. Tie book credits and depreciation to the business computation, and use the adjusted tax cost in the relevant block, through Schedule DPM for plant and machinery or Schedule DOA for other assets in the notified ITR-6, as applicable. Do not reduce the same cost twice, or exclude a separate operating grant from income merely because it is received with asset assistance.
Preserve evidence of changes and timing
Maintain sanction terms, acquired asset details, funding receipts and the prior and current tax computations. If entitlement, allocation, recovery or cash timing changes after filing, review its tax year and the available correction route on the facts. These examples use assumed costs and assistance accepted as meeting cost, before separate section 32 rate and eligibility tests.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Direct funding of one machine
A qualifying ₹18 lakh subsidy meets part of a machine costing ₹90 lakh. Its tax actual cost is ₹72 lakh before other adjustments.
Illustrative example 2: One grant for two assets
A ₹30 lakh common grant refers only to machines costing ₹60 lakh and ₹90 lakh. Allocate ₹12 lakh and ₹18 lakh respectively. Adjusted costs are ₹48 lakh and ₹72 lakh.
Illustrative example 3: Exclude unrelated equipment
A ₹24 lakh grant refers to two assets costing ₹50 lakh and ₹70 lakh. Separate equipment costing ₹80 lakh is outside the scheme. Allocate ₹10 lakh and ₹14 lakh across the covered assets, leaving adjusted costs of ₹40 lakh and ₹56 lakh. The unrelated asset receives no allocation.
Illustrative example 4: Direct and common assistance
Machines A and B cost ₹50 lakh and ₹100 lakh. A ₹10 lakh amount is specifically for A. A separate ₹15 lakh common amount refers to both on those costs. A receives ₹15 lakh in total and B ₹10 lakh; the adjusted costs are ₹35 lakh and ₹90 lakh.
Illustrative example 5: Separate the non-asset payment
A ₹22 lakh receipt comprises ₹14 lakh that meets the cost of a ₹70 lakh asset and ₹8 lakh of separately identified operating support. The asset’s tax cost is ₹56 lakh. Only the supported ₹14 lakh enters the Explanation 10 adjustment and the corresponding section 2(24)(xviii)(a) analysis. Test the ₹8 lakh operating support under the applicable income rules.
Illustrative example 6: Find the double reduction
A ledger’s net presentation shows ₹84 lakh from gross cost ₹100 lakh less ₹16 lakh qualifying aid. If no other differences exist, deducting ₹16 lakh again in the tax register would incorrectly show ₹68 lakh instead of ₹84 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the applicable assessment year and statute | Return and computation cover sheet |
| 2 | Read the sanction and eligibility terms | Scheme and award documents |
| 3 | Separate asset funding from other support | Receipt and legal classification bridge |
| 4 | Match direct aid to the actual asset | Asset invoices and grant records |
| 5 | Identify the full pool for any common amount | Approved assets and acquisition costs |
| 6 | Recompute each allocation and the total | Proportional allocation working |
| 7 | Reconcile actual tax cost and the block | Tax asset register and depreciation schedule |
| 8 | Verify the amount excluded from income | Section 2(24)(xviii) reconciliation |
| 9 | Compare tax adjustments with book postings | Book-to-tax working and ITR-6 bridge |
| 10 | Escalate subsequent changes for review | Dated records and correction analysis |
Sixteen practitioner FAQs
1. Does any capital-labelled grant reduce actual cost?
Verify whether it meets acquired asset cost and the Explanation 10 conditions.
2. Does the explanation apply only to Central Government grants?
No. Its text identifies other sources too.
3. Can a directly linked amount be spread over unrelated assets?
First apply the supported direct connection to the relevant asset.
4. What if no one asset can be identified?
Use the statutory proportional test across the assets referenced by the grant.
5. Can the whole fixed asset register be the denominator?
Only include the asset population supported by the assistance terms.
6. Can a separate operating grant enter the asset pool?
Analyse it independently; receipt in the same remittance is not decisive.
7. What if the grant is smaller than the asset cost?
Exclude only the supported attributable portion.
8. Can the same amount be taxed as aid and also reduce cost?
Review the statutory exclusion for amounts actually taken into account under Explanation 10.
9. Is book netting enough evidence of tax actual cost?
Reconcile the actual cost under the tax rule with the support and book entries.
10. What if the grant is shown as deferred income in the accounts?
Maintain a separate tax analysis and reconcile the relevant book credits.
11. Does the explanation prescribe a depreciation rate?
No. The asset class, use and applicable section 32 rules determine that separately.
12. Can common aid be allocated using asset counts by default?
The proportional test requires a supported asset-cost working rather than assuming equal value per item.
13. What if a scheme covers different tax blocks?
Allocate to the assets first, then post the adjusted costs to the correct blocks.
14. Does a change in grant evidence justify a current-year adjustment automatically?
Review the legal year and correction procedure on the actual facts.
15. How can a reviewer detect a duplicate adjustment?
Trace gross cost, aid, book netting and tax cost in one bridge.
16. What proof should be retained for an indirect reimbursement?
Keep the scheme, disbursement route, paid costs and evidence connecting the reimbursement to the acquired asset.
Official sources
Income-tax Act, 1961: section 2(24)(xviii) and Explanation 10 to section 43(1) CBDT: notified ITR-6 for AY 2026–27