The statement and the deduction answer different questions
For FY 2025–26 and AY 2026–27, the Income-tax Act, 1961 continues to govern. An Indian company with specified expenditure linked to a qualifying new unit or extension may be eligible for section 35D, subject to the facts and conditions. The proviso to section 35D(2)(a) and Rule 6ABBB require Form 3AF to report that clause’s expenditure for each previous year. Keep the statement for the year of expenditure separate from the year in which the first deduction may be claimed. The statement is neither the entire section 35D pool nor the one-fifth instalment to deduct in the return.
Read the applicable text: Income-tax Act, 1961, section 35D CBDT Notification 54/2023, Rule 6ABBB and Form 3AF Income Tax Department AY 2026–27 transition guidance Notified ITR-6 for AY 2026–27 ITR-6 corrigendum CBDT Circular 7/2026 Official AY return utilities, schema and validations.
Build the activity and provider working
Section 35D(2)(a) covers feasibility reports, project reports, market or other necessary surveys, and engineering services relating to the business. Match those activities to deliverables, provider evidence and amounts by previous year. The notified Form 3AF requires separate particulars where more than one person performs the activity, and uses SELF where carried out by the assessee. Support any self-performed expenditure with actual attributable cost records. Analyse clause (b) or (c) expenditure separately where applicable; do not add it to the statement just because it may enter the overall statutory pool.
Identify the first instalment year and the ceiling
For the new-unit branch, link the start of the five successive annual instalments to commencement of production or operation, not merely the expenditure date. Under section 35D(3) for the applicable post-March 1998 expenditure, limit the eligible pool to 5% of statutory project cost or, for an Indian company choosing that alternative, statutory capital employed. Do not use a commercial project budget or all company borrowings as a substitute. For a new unit, use the actual cost of the specified fixed assets acquired or developed for that unit and shown in the books at the end of the previous year in which it starts production or operation. For the alternative capital-employed ceiling, use only the issued share capital, debentures and statutory long-term borrowings linked to the new unit, measured at that same year-end.
Reconcile book charges and the tax claim
Maintain the approved Form 3AF figure, full eligible pool, applicable ceiling, amount admitted into the five-year schedule and current deduction as separate totals. Reverse a book charge in the business computation where it is not independently deductible, and allow only the current supported section 35D instalment once. In notified ITR-6, Schedule BP item 32 is the residual deduction line for other allowable amounts; reconcile the net effect and do not use Schedule ESR for section 35D, as BP item 29 relates to sections 35, 35CCC and 35CCD. Keep a prior-claims register. Section 35D(6) bars deduction under another provision for the same expenditure once the section 35D deduction is claimed and allowed, including for a different assessment year.
Calendar the statement separately from the return
Rule 6ABBB specifies electronic filing one month before the section 139(1) return due date. Use a digital signature where the return requires one, or the electronic verification code route otherwise. For AY 2026–27, Circular 7/2026 extends the covered 31 October return date to 21 November and separately specifies 21 October for that class's section 44AB audit report. The separate section 92E return class has a statutory 30 November date. The circular does not expressly name Form 3AF; apply its own linked rule to the relevant section 139(1) deadline and verify the form calendar before filing. Use the correct AY utility and save the form acknowledgment independently of the return.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Separate the statement from the tax pool
A new-unit file has ₹4 lakh of feasibility work and ₹2 lakh of project reports plus ₹1 lakh assumed independently eligible agreement drafting under clause (b). Form 3AF clause (a) detail is ₹6 lakh; the aggregate candidate pool is ₹7 lakh.
Illustrative example 2: Separate providers and SELF
An engineering activity includes supported charges of ₹1.1 lakh and ₹0.8 lakh from two providers and actual eligible self-performed cost of ₹0.6 lakh. The activity total is ₹2.5 lakh; retain three traceable lines.
Illustrative example 3: Apply the project ceiling
Eligible expenditure is ₹12 lakh and qualifying project cost is ₹1.8 crore. A 5% ceiling admits ₹9 lakh; the excess is ₹3 lakh and each eligible annual instalment is ₹1.8 lakh.
Illustrative example 4: Test the alternative company base
Assume eligible costs of ₹11 lakh, statutory project cost ₹1.6 crore and statutory capital employed ₹2 crore. The respective ceilings are ₹8 lakh and ₹10 lakh. If the company validly chooses capital employed, the current one-fifth amount is ₹2 lakh.
Illustrative example 5: Spending before operations begin
A company incurs ₹5 lakh of otherwise eligible clause (a) expenses in FY 2025–26 but the new unit starts operations in FY 2026–27. The AY 2026–27 instalment is zero. For tax year 2026–27, separately test section 44, the savings provisions in section 536 and the relevant form requirements, including Form 5 where applicable. If the full ₹5 lakh is admitted, one-fifth is ₹1 lakh per year; the arithmetic does not itself establish entitlement.
Illustrative example 6: One book charge and one deduction
An eligible pool of ₹10 lakh was debited fully in the accounts, and a supported current deduction is ₹2 lakh. If the full book charge otherwise requires reversal, add back ₹10 lakh and deduct ₹2 lakh. The net increase over book profit is ₹8 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the exact tax year | FY and AY evidence |
| 2 | Prove the new-unit or extension event | Commissioning or completion records |
| 3 | Classify clause (a) activities | Deliverables and statutory category |
| 4 | Reconcile provider and SELF details | Invoices, identity and cost records |
| 5 | Keep other eligible clauses separate | Legal charges and other documented evidence |
| 6 | Calculate the statutory ceiling | Project assets or eligible capital-employed working |
| 7 | Build the cohort | First eligible year and five annual balances |
| 8 | Review the Form 3AF calendar | Rule, applicable return class and portal evidence |
| 9 | Tie to the company return | Book adjustment, BP claim and filing validation |
| 10 | Archive both acknowledgments | Form submission, return and supporting computation |
Sixteen practitioner FAQs
1. Is Form 3AF the amount deducted in ITR-6?
No. It provides clause (a) particulars; compute the eligible instalment separately.
2. Does it include every section 35D expense?
It addresses section 35D(2)(a), not all possible clauses.
3. Does a project report always qualify?
Check the statutory connection and actual deliverable.
4. How should two providers be shown?
Use separate details as the notified form instructs.
5. How should the company show its own activity?
The form note instructs use of SELF; retain support for attributable cost.
6. Can a provider approval under the old condition replace the statement?
The amended proviso and Rule 6ABBB prescribe the statement route.
7. Does the invoice date begin amortisation?
For a new unit use commencement of production or operation.
8. Can the entire eligible pool be deducted in one year?
For this expenditure apply the five equal annual instalments.
9. Is every project budget item part of project cost?
Use the statutory definition and qualifying fixed-asset working.
10. Can an Indian company test capital employed?
Yes, section 35D(3) provides that alternative at its option, subject to the definition.
11. Is Form 3AF signed electronically?
Rule 6ABBB requires digital signature where the return requires one.
12. Is its timing based on the actual return filing date?
No. The rule refers to the section 139(1) due date.
13. Does the audit extension automatically replace the form rule?
No. Review the form's own linked requirement and the covered return class.
14. Is Schedule ESR the route for this instalment?
No. The notified BP link to ESR concerns sections 35, 35CCC and 35CCD.
15. Can a book charge and tax instalment both reduce taxable profit?
Reconcile so the expense does not receive duplicate relief.
16. Can the 2025 Act form be used just because submission occurs after April 2026?
Use Form 3AF for the relevant previous year under the 1961 Act. Form 5 belongs to the procedure under the 2025 Act; the filing date alone does not decide which law applies.
Official sources
Income-tax Act, 1961, section 35D CBDT Notification 54/2023, Rule 6ABBB and Form 3AF Income Tax Department AY 2026–27 transition guidance Notified ITR-6 for AY 2026–27 ITR-6 corrigendum CBDT Circular 7/2026 Official AY return utilities, schema and validations
Finance Act, 2023: amendment to section 35D(2)(a)
Income-tax Act, 2025: sections 44 and 536
Income Tax Department: Form 5 guidance for periods governed by the 2025 Act