Use a tax fund ledger, not a provision balance
For tax year 2026–27, section 49 of the Income-tax Act, 2025 directs qualifying petroleum and natural-gas businesses to Schedule X. The deduction is the lower of qualifying deposits and 20% of the specified business profit before this deduction. A book provision for future restoration is not itself a qualifying deposit. This guide was checked on 28 October 2026 and does not apply new Act section numbers to FY 2025–26 / AY 2026–27 returns. Income-tax Act, 2025 as amended by Finance Act 2026: section 49 and Schedule X.
Verify the population and account
Section 49 and Schedule X paragraph 2 require the specified Indian petroleum or natural-gas business, its Central Government agreement, and a deposit before tax-year end in the qualifying SBI special account or site restoration account under the relevant scheme. An ordinary reserve or unrestricted bank deposit is not interchangeable. Establish the applicable scheme, business audit and prescribed reporting compliance; paragraph 2 refers to the specified date in section 63. This calculation guide does not invent a form number or calendar extension. Income-tax Act, 2025 as amended by Finance Act 2026: section 49 and Schedule X.
Calculate the business cap before brought-forward losses
Schedule X paragraph 1 uses profit of that business computed under the business-income head before this deduction. It places this deduction before the section 112 brought-forward-loss set-off. Interest credited to the specified account is deemed a deposit. Reconcile principal, interest, qualifying deposits and the separately verified profit base; a company's total accounting profit can include activities outside the qualifying business. Do not deduct the same amount again in another year: paragraph 2(3) prohibits that duplication. Income-tax Act, 2025 as amended by Finance Act 2026: section 49 and Schedule X.
Withdrawals have a different tax trigger
Paragraph 3 permits withdrawal for the scheme's purposes and deals separately with closure and failure to utilise released or withdrawn amounts within the tax year. For an ordinary closure, its formula deducts the qualifying Central Government profit or production share from the amount withdrawn. Establish that share from the actual agreement rather than subtracting every government payment. The closure rule also applies on the stated basis where the business no longer exists. Income-tax Act, 2025 as amended by Finance Act 2026: section 49 and Schedule X.
Trace actual use and avoid a second expense deduction
For a scheme-purpose release or withdrawal not wholly utilised within that tax year, paragraph 3(5) brings the relevant unutilised amount into business profits. Paragraphs 3(6) and 4 prevent another business deduction for expenditure met through the specified-account amounts. Keep the source-of-funds bridge even if the accounts present restoration costs as an expense. These statutory rules do not mean an accounting provision and the scheme's tax fund must have identical balances. Income-tax Act, 2025 as amended by Finance Act 2026: section 49 and Schedule X.
Do not treat all assets as unrestricted purchases
Paragraph 3 lists excluded articles and paragraph 5 can recapture the part of asset cost linked to the deduction if the covered asset is sold or transferred before the expiry of eight years from the end of the tax year in which it was acquired. There are express specified-transferee and qualifying succession exceptions. Asset transfers need a separate legal review; the six examples here concern deposit, use and closure arithmetic and do not assume an exception. Retain audit evidence, bank statements, utilisation invoices and the agreement together. Income-tax Act, 2025 as amended by Finance Act 2026: section 49 and Schedule X.
Applicable primary references
Income-tax Act, 2025 as amended by Finance Act 2026: section 49 and Schedule X
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Deposit below the cap
Assume every eligibility and audit condition is satisfied, relevant business profit before this deduction is ₹1,00,00,000 and qualifying deposit ₹15,00,000. The 20% cap is ₹20,00,000, so deduction is ₹15,00,000. An unbanked book provision does not raise it.
Illustrative example 2: Deposit exceeds the cap
With verified qualifying profit ₹1,00,00,000 and deposit ₹25,00,000, deduction is ₹20,00,000. The ₹5,00,000 difference is not automatically a fresh deduction next year; establish the actual statutory basis rather than carrying a spreadsheet claim forward.
Illustrative example 3: Interest forms part of the deposit working
Assume qualifying principal deposited ₹12,00,000, credited interest ₹1,00,000 and relevant pre-deduction business profit ₹80,00,000. Deemed deposits total ₹13,00,000 against a ₹16,00,000 cap, so the model deduction is ₹13,00,000. The profit figure already includes all required tax adjustments.
Illustrative example 4: Unused withdrawal
Assume a scheme-purpose withdrawal ₹10,00,000, of which only ₹7,00,000 is validly utilised within that tax year. The remaining ₹3,00,000 is the unutilised amount for the paragraph 3(5) working, subject to establishing the actual release and permitted use.
Illustrative example 5: Closure formula
Assume closure withdrawal ₹40,00,000 and ₹6,00,000 actually payable to the Central Government as the agreement's qualifying profit or production share. The stated closure formula gives ₹34,00,000 of deemed business profits. Ordinary taxes or unrelated fees cannot be substituted for that share.
Illustrative example 6: Funded expense bridge
Assume ₹8,00,000 of scheme-funded expenditure is already deducted in starting book profit ₹50,00,000, and paragraph 4 prohibits its tax deduction on the verified facts. Adding back that ₹8,00,000 gives ₹58,00,000 before other tax adjustments. Do not also add the same expense a second time under a duplicate adjustment label.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the qualifying business | Petroleum or natural-gas activity and Indian operations |
| 2 | Read the government agreement | Parties, scope and profit or production share |
| 3 | Identify the scheme account | Bank confirmation and governing scheme |
| 4 | Check deposit timing | Actual credits before tax-year end |
| 5 | Reconcile interest | Credited amounts and tax-profit treatment |
| 6 | Compute the cap | Verified pre-deduction business profit |
| 7 | Confirm audit compliance | Applicable section 63 date and prescribed reporting evidence |
| 8 | Trace each withdrawal | Purpose, date, utilisation and remaining amount |
| 9 | Reconcile funded expenditure | No repeated deduction of the same scheme-funded cost |
| 10 | Close the tax ledger | Deduction, deemed income, asset review and closing bank balance |
Sixteen practitioner FAQs
1. Does a restoration provision establish this deduction?
No. Establish qualifying deposits and every statutory condition.
2. Which businesses are covered here?
The specified petroleum or natural-gas business in India with the required Central Government agreement.
3. Is any bank account sufficient?
No. Identify the special account or site restoration account under the relevant scheme.
4. What is the basic deduction cap?
The lower of qualifying deposits and 20% of the specified pre-deduction business profit.
5. Is company-wide accounting profit automatically the cap base?
No. Compute the relevant business profit under the statutory framework.
6. When must the deposit be made?
Before the end of the tax year under paragraph 2.
7. Can credited interest be relevant?
Yes. Paragraph 1 deems credited interest a deposit.
8. Does the deduction come after brought-forward section 112 losses?
Paragraph 1 specifies that it comes before that set-off.
9. Can the same allowed deposit be deducted next year again?
Paragraph 2(3) prevents another deduction of the same amount.
10. Does this guide prescribe an unverified audit form?
No. Check the current prescribed compliance under paragraph 2 and section 63.
11. Are all withdrawals immediately identical taxable receipts?
No. Distinguish closure, permitted use and unutilised withdrawals.
12. What reduces the closure formula?
The qualifying government profit or production share specified in the agreement and Schedule X.
13. Does cessation necessarily eliminate closure taxation?
Paragraph 3(4) preserves the specified treatment as if the business existed.
14. Can a scheme-funded expense get a second business deduction?
Paragraphs 3(6) and 4 prohibit the covered repeated deduction.
15. Are assets acquired through the scheme free of later conditions?
No. Review paragraph 5's transfer recapture and exceptions.
16. What should the annual reconciliation explain?
Deposits, interest, capped deduction, withdrawals, utilisation, deemed profits and closing funds.
Conclusion
Compute the qualifying site-restoration deposit deduction separately from unused withdrawals, closure profits and expenditure already funded through the scheme.