Section 35 (R&D Deduction)

Section 35 of the Income Tax Act provides a deduction for expenditure on scientific research — both in-house and through approved external institutions. The deduction reduces taxable income in the year the expenditure is incurred, enabling companies with significant R&D spend to pay less tax in those years. For a loss-making company, Section 35 increases the carryforward loss that will shelter future profits.

Who it applies to

• Companies and LLPs with approved in-house R&D facilities (DSIR approval required for the Section 35(2AB) deduction)
• Companies making payments to approved research institutions, universities, or National Laboratories
• Deep tech, biotech, pharma, semiconductor, and software R&D companies with material research expenditure
• Any company employing scientific personnel and maintaining a dedicated research programme

What the deduction covers

In-house R&D (Section 35(2AB)):

• Revenue expenditure: salaries of R&D staff, materials, consumables, utilities for the research facility
• Capital expenditure: equipment, instruments, and other assets used exclusively for research

Capital assets are deductible at 100% in the year of acquisition — not depreciated over their useful life. This accelerated deduction is the primary benefit for capital-intensive research operations.

Payments to external research bodies (Section 35(1)(ii) and (iii)):

• Payments to approved scientific research associations (CSIR labs, IITs, national institutes)
• Contributions to universities with approved research programmes
• Deductible at 100% of the payment in the year of contribution

The super-deduction history

Before AY 2021-22, Section 35(2AB) allowed a weighted super-deduction:

The rationalisation removed the multiplication benefit. The cash tax saving is now: R&D spend × applicable tax rate — the same as treating R&D as a normal operating expense. The remaining structural advantage is the accelerated capital deduction: full write-off in year one versus depreciation spread over several years.

What most founders miss

DSIR approval must precede the expenditure. Companies that spend on R&D for years without DSIR approval can only claim the expenditure as a general business deduction under Section 37. The specific Section 35(2AB) treatment — including full capital write-off in the year of acquisition — requires an approved facility from the date the R&D programme begins. Retroactive approval is not available. Apply for DSIR approval as early as possible once a dedicated research facility is established.

Section 35 does not eliminate MAT. MAT is calculated on book profits, not taxable income. A biotech company that zeros out income tax using Section 35 may still owe 15% MAT on book profits. The Section 80-IAC deduction (requiring separate IMB approval) provides the MAT relief under Section 115JB(6); Section 35 does not.

The capital deduction is a timing benefit, not an absolute saving. A ₹1 crore lab instrument deducted fully in Year 1 under Section 35 saves tax sooner; under normal depreciation it would be spread over several years. Total lifetime deduction is the same — Section 35 accelerates cash flow in early capital-intensive R&D years.

Section 35, Section 80-IAC, and BIRAC grants can coexist. Section 35 reduces income tax in R&D-heavy years. Section 80-IAC eliminates both income tax and MAT in the three elected years (for IMB-approved companies). BIRAC grants are typically treated as capital receipts or offset against R&D expenditure. All three can apply to the same company without conflict.

See also

• MAT (Minimum Alternate Tax) — Section 35 reduces income tax but not MAT; both computations must be performed separately
• Section 80-IAC — the tax holiday that also eliminates MAT for IMB-approved companies; combinable with Section 35 in non-holiday years
• DPIIT Recognition — enables fast-track patent examination and IP fee rebates for companies with active R&D programmes
• Advance Tax — Section 35 deductions reduce the income tax estimate used for advance tax instalment calculations