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Deductions Allowed Only on Actual Payment: Section 37 (Earlier 43B) and Dues to Micro and Small Enterprises (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 29 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 37 of the Income-tax Act, 2025 allows certain expenses only in the year they are actually paid, whatever the accounting method: taxes, duties and cess, employer’s contribution to provident, superannuation and gratuity funds, leave encashment, interest to specified financial entities, railway dues and dues to micro and small enterprises.
  • Most of these are allowed in the year of accrual if paid on or before the due date for filing the return (section 37(3)); the exception is the amount owed to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act, which is allowed only when it is actually paid.
  • Interest converted into a loan or debenture is not treated as paid.
  • A deduction allowed in the year of accrual is not allowed again when it is paid (section 37(5)).

Many businesses account for expenses when they are incurred, but the Income-tax Act, 2025 allows a short list of expenses as deductions only when they are actually paid. This was section 43B of the 1961 Act, including the clause (h) added in 2023 for dues to micro and small enterprises. It is now section 37.

The rule (section 37(1) and (2))

The sums listed below, which are otherwise allowable as deductions, are allowed while computing business or professional income only in the tax year in which they are actually paid, irrespective of any contrary provision, the method of accounting regularly followed, or the year in which the liability was incurred:

  1. Tax, duty, cess, surcharge or fee, by whatever name called, levied under any law in force.
  2. The employer’s contribution to a provident fund, superannuation fund, gratuity fund or any fund for the welfare of employees.
  3. The amount payable by an employer in lieu of leave at the credit of an employee (leave encashment).
  4. Any sum referred to in section 32(a).
  5. Interest on loans, advances or borrowings from specified financial entities, as per the terms of the loan agreement.
  6. An amount payable to Indian Railways for use of railway assets.
  7. An amount payable to a micro or small enterprise beyond the time limit in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006.

Payment by the return due date (section 37(3))

For items 1 to 6, if the sum is paid after the end of the tax year but on or before the due date for filing the return under section 263(1) for that year, the deduction is allowed in the year in which the liability was incurred. Item 7 (MSME dues) is excluded from this relief.

Example. A company owes ₹4,00,000 as the employer’s PF contribution for March 2027 and pays it on 10 July 2027, before the return due date. The deduction is available for tax year 2026-27, since payment was made by the return due date. If it paid on 15 November 2027, after the due date, the deduction is allowed only in the year of payment, tax year 2027-28.

Dues to micro and small enterprises (item 7)

Under section 15 of the MSMED Act, 2006, a buyer must pay a micro or small enterprise by the agreed date, which cannot be more than 45 days from the day of acceptance of the goods or services, or within 15 days if there is no written agreement. The Income-tax Act adds a tax consequence: an amount that is payable to a micro or small enterprise beyond that time limit is deductible only in the year in which it is actually paid.

  • It applies to micro and small enterprises only, as classified under the MSMED Act (section 66(11) and (30) of the Income-tax Act refer to the classification under that Act). Medium enterprises are not covered.
  • No grace till the return due date. For MSME dues, payment after year end does not bring the deduction back to the earlier year (section 37(3)).
  • The disallowance relates to the amount payable beyond the limit. If the invoice is not yet beyond the limit on the last day of the year, we read the section as not applying to it at that date, but if it remains unpaid after the limit, it falls in the rule. Take advice on year end creditors.

Example. On 31 March 2027, a buyer owes a micro enterprise supplier ₹5,00,000 for an invoice accepted on 1 January 2027. With a 45 day agreement the due date was 15 February 2027, so the dues are beyond the limit at year end. If paid on 20 April 2027, the deduction is for tax year 2027-28, not 2026-27. Had the buyer paid before 31 March 2027, the deduction would be in 2026-27.

Other points

  • Interest converted into a loan (section 37(4)): if interest on a loan from a specified financial entity is converted into a loan, advance, debenture or any other instrument that defers the liability to a future date, it is not treated as paid.
  • No double deduction (section 37(5)): a sum deducted in the year the liability was incurred is not deducted again when paid.
  • Employee contributions (section 37(6)): the section does not apply to a sum received from an employee as a contribution to a fund. The employee’s contribution is dealt with separately in section 29(1)(e), which allows it if credited to the fund by the due date as prescribed.
  • Payment means actual payment. A journal entry or a provision is not payment. A payment by account payee cheque or electronic mode counts.

Practical steps for a business

  1. Keep a list of MSME creditors (check the supplier’s udyam registration), with invoice dates and payment due dates.
  2. Pay MSME dues within 45 days, or within the agreed shorter period, wherever possible.
  3. Pay statutory dues (GST, PF, ESI, professional tax, TDS) before the return due date.
  4. Reconcile year-end creditors and disclose the details in the tax audit report, where an audit is required (see our post on tax audit).
  5. Document the payment date with bank statements.

Frequently asked questions

Which expenses are allowed only on actual payment?

Tax, duty, cess, surcharge or fee levied under any law; the employer’s contribution to a provident, superannuation or gratuity fund or any fund for employees’ welfare; payment in lieu of leave at the credit of an employee; interest on loans from specified financial entities; amounts payable to Indian Railways for use of railway assets; and amounts owed to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act (section 37(2)).

Does a late payment by the return due date still get the deduction?

For all items except dues to micro and small enterprises, payment on or before the due date for filing the return under section 263(1) for that year gives the deduction in the year the liability was incurred (section 37(3)).

What is the rule for MSME dues?

An amount payable to a micro or small enterprise beyond the time limit in section 15 of the MSMED Act is deductible only in the year it is actually paid. Paying it after year end but before the return due date does not bring it back to the earlier year (section 37(3) excludes clause (g)).

What is the time limit in the MSMED Act?

Section 15 requires payment by the agreed date, which cannot be more than 45 days from acceptance of the goods or services, or within 15 days if there is no agreement.

Does it apply to medium enterprises or traders?

The clause covers a micro or small enterprise supplier. It does not cover a medium enterprise.

What about interest converted into a loan?

If interest on a loan from a specified financial entity is converted into a loan, advance, debenture or similar instrument that defers payment, it is not treated as paid (section 37(4)).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

AGM and EGM under the Companies Act, 2013: Time Limits, Notice, Place, Requisition and Penalty for Default

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Every company except a One Person Company must hold an annual general meeting each year, with not more than 15 months between two AGMs. The first AGM is due within nine months of the first financial year end, and later AGMs within six months of the financial year end.
  • The Registrar can extend the time for an AGM (other than the first) by up to three months, for a special reason.
  • A general meeting needs at least 21 clear days notice, or shorter notice if 95% of the members entitled to vote consent in writing or electronically.
  • If the Board does not call an EGM within 21 days of a valid requisition by members holding one-tenth of the voting paid-up capital, the requisitionists can call it themselves. Default in holding an AGM is punishable with a fine up to Rs 1 lakh and Rs 5,000 a day.

General meetings are where the members of a company exercise their rights: they approve the accounts, appoint auditors and pass the major resolutions. The Companies Act, 2013 separates the yearly annual general meeting (AGM) from any other extraordinary general meeting (EGM) and sets strict timelines for both.

Annual general meeting: section 96

  • Who: every company other than a One Person Company holds an AGM every year, and calls it an AGM in the notice.
  • Gap between AGMs: not more than 15 months between one AGM and the next.
  • First AGM: within nine months from the closing of the first financial year. A company that holds its first AGM in this way need not hold an AGM in the year of its incorporation.
  • Every other AGM: within six months from the closing of the financial year. For a March year-end, that is by 30 September.
  • Extension: the Registrar can, for a special reason, extend the time for an AGM other than the first by up to three months.
  • Time and place: called during business hours (between 9 a.m. and 6 p.m.) on a day that is not a National Holiday, at the registered office or another place in the same city, town or village. An unlisted company may hold the AGM at any place in India if all members give consent in advance, in writing or electronically. The Central Government can exempt a company from this sub-section on conditions.

If the company does not hold an AGM

  • Tribunal (section 97): on a member’s application, the Tribunal can call or direct the calling of an AGM, and can direct that one member present in person or by proxy is a valid meeting. A meeting so held is treated as the AGM.
  • Other meetings (section 98): where it is impracticable to call, hold or conduct a meeting (other than an AGM) in the usual manner, the Tribunal can order how it is to be called, held and conducted.
  • Penalty (section 99): the company and every officer in default are punishable with a fine which may extend to Rs 1 lakh, and for a continuing default a further fine which may extend to Rs 5,000 for every day during which the default continues.

Extraordinary general meeting: section 100

  • The Board may call an EGM whenever it considers fit. An EGM is held at a place within India (except for a wholly owned subsidiary of a company incorporated outside India).
  • Requisition: members holding at least one-tenth of the paid-up share capital that carries the right to vote (or at least one-tenth of the total voting power, in a company without share capital) on the date the requisition is received can require the Board to call an EGM.
  • The requisition sets out the matters to be considered, is signed by the requisitionists and is sent to the registered office.
  • If the Board does not, within 21 days of receiving a valid requisition, proceed to call a meeting on a day not later than 45 days from the receipt, the requisitionists may call and hold the meeting themselves within three months of the requisition, in the same manner as the Board would.
  • The company reimburses their reasonable expenses, and deducts the sum from any remuneration under section 197 payable to the directors who were in default.

Notice of a meeting: sections 101 and 102

  • Period: not less than clear 21 days notice, in writing or by electronic mode as prescribed. “Clear” days exclude the day of giving the notice and the day of the meeting.
  • Shorter notice: allowed if consent is given in writing or electronically: for an AGM, by not less than 95% of the members entitled to vote; for any other general meeting, by members who are a majority in number and hold at least 95% of the voting paid-up share capital (or hold at least 95% of the total voting power, in a company without share capital).
  • Contents: the place, date, day and hour, and a statement of the business to be transacted.
  • Who gets the notice: every member, the legal representative of a deceased member or the assignee of an insolvent member, the auditors, and every director.
  • Accidental omission: the accidental omission to give notice to, or the non-receipt of notice by, any person entitled to it does not invalidate the proceedings.
  • Explanatory statement: each item of special business must have a statement of material facts annexed to the notice, including the nature of any interest of every director, the manager, other key managerial personnel and their relatives in that item.

A simple calendar for a March year-end company

Task Date
Financial year ends 31 March
AGM due (six months) 30 September
Last day to send the notice for a meeting on 30 September (21 clear days, excluding the day of sending and the day of the meeting) 8 September
Registrar’s extension for a special reason by up to three months, so up to 31 December
Next AGM, at the latest within 15 months of the previous AGM

Points to check

  • Notice, e-voting, proxies, minutes and filing of the resolutions and annual return are covered by other sections and rules. This post covers the timing, place and notice rules in sections 96 to 102.
  • The text above follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition. The Ministry has at times extended AGM dates by general circular; check the MCA website for any relaxation that applies to your financial year.
  • Listed companies must also follow SEBI’s listing regulations on meetings.

Frequently asked questions

Within what time must a company hold its AGM?

The first AGM within nine months from the closing of the first financial year. Every later AGM within six months from the closing of the financial year, and not more than 15 months after the previous AGM.

Can the AGM date be extended?

Yes. The Registrar may, for a special reason, extend the time for any AGM other than the first by a period not exceeding three months.

Does a One Person Company hold an AGM?

No. Section 96 applies to every company other than a One Person Company.

What is the notice period for a general meeting?

Not less than clear 21 days, in writing or by electronic mode. A shorter notice is valid if, for an AGM, not less than 95% of the members entitled to vote consent in writing or electronically.

Where can an AGM be held?

During business hours (9 a.m. to 6 p.m.) on a day that is not a National Holiday, at the registered office or at some other place within the city, town or village of the registered office. An unlisted company may hold it at any place in India if all members consent in writing or electronically in advance.

How can members force an EGM?

Members holding at least one-tenth of the paid-up share capital that carries voting rights (or one-tenth of the voting power in a company without share capital) can requisition it. If the Board does not call the meeting within 21 days, for a date not later than 45 days from the requisition, the requisitionists can call it within three months.

What is the penalty for not holding an AGM?

The company and every officer in default are punishable with a fine up to Rs 1 lakh, and a further fine up to Rs 5,000 for every day of continuing default.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Depreciation Under the Income-tax Act 2025: Rates, Block of Assets, Additional Depreciation and Carry Forward (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 17 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Depreciation under section 33 is allowed on buildings, machinery, plant and furniture and on intangible assets such as patents and licences, at a percentage of the written down value (WDV) of the block of assets (Rule 25 and Appendix I).
  • Key rates: residential buildings 5%, other buildings 10%, furniture 10%, plant and machinery 15%, motor cars 15%, buses, lorries and taxis on hire 30%, computers and software 40%, intangibles 25%.
  • An asset put to use for less than 180 days in the year gets half the rate, and new plant and machinery for manufacture or power generation can get additional depreciation of 20% (section 33(8) and (9)), which the new regime for individuals does not allow.
  • Unabsorbed depreciation is carried forward without a time limit and added to the next year’s depreciation (section 33(11)); land and goodwill are not depreciable.

Depreciation is a deduction in computing business or professional income for the wear and tear of assets. It is governed by section 33 of the Income-tax Act, 2025 (earlier section 32), with the rates in Rule 25 and Appendix I of the Income-tax Rules, 2026. It is a tax calculation, separate from the depreciation in the company’s accounts.

What qualifies (section 33(1))

  • Tangible assets: buildings, machinery, plant and furniture.
  • Intangible assets: know-how, patents, copyrights, trademarks, licences, franchises or other similar business or commercial rights, acquired on or after 1 April 1998.
  • The asset must be owned (wholly or partly) by the assessee and used wholly and exclusively for the business or profession.

Not depreciable: land and goodwill of a business or profession. If an asset is used only partly for the business, depreciation is restricted to a fair proportion (section 33(3)(b)).

Depreciation is allowed whether or not you claim it, so the written down value is reduced by the depreciation allowable each year (section 33(7)).

Block of assets and written down value

Assets of the same class with the same rate form a block. Depreciation is a percentage of the written down value of the block (section 33(3)(a)):

WDV = opening WDV + cost of assets bought in the year - sale proceeds of assets sold - depreciation of the year.

Half rate (section 33(4)): if an asset is acquired during the year and used for less than 180 days in that year, the depreciation on it is 50% of the prescribed rate.

Renovation of a leased building (section 33(6)): capital expenditure on a structure or renovation of a leased or occupied building is treated as a building owned by the assessee.

Rates (Rule 25 and Appendix I)

Block Rate on WDV
Buildings mainly for residence (other than hotels and boarding houses) 5%
Other buildings 10%
Purely temporary erections such as wooden structures 40%
Furniture and fittings, including electrical fittings 10%
Machinery and plant (general) 15%
Motor cars (other than those used on hire) 15%
Motor buses, lorries and taxis used on hire 30%
Aeroplanes and aero engines 40%
Computers, including computer software 40%
Containers of glass or plastic used as refills 40%
Energy saving devices, pollution control equipment, certain life saving medical equipment and certain other listed items 40%
Know-how, patents, copyrights, trademarks, licences, franchises (intangibles) 25%

“Buildings” include roads, bridges, culverts, wells and tubewells. A building is “mainly residential” if at least two thirds of its built-up area is used for residence. Assets that the table does not list separately, such as air conditioners, televisions, inverters and mobile phones, fall in the general class of machinery and plant at 15%; a laptop or desktop is a computer at 40%. Check the specific entries for special equipment.

40% ceiling for the new regimes (Rule 25(2)): the depreciation on any block cannot exceed 40% of the WDV for a domestic company that opts for the concessional rate under section 199(3), 200(5) or 201(2), for an individual, HUF, AOP, BOI or artificial juridical person whose income is taxed under section 202(1), and for a co-operative society that has exercised an option under section 203(5) or 204(2).

Additional depreciation (section 33(8) and (9))

For a business of manufacture or production, or generation, transmission or distribution of power, new machinery or plant acquired and installed and first put to use by the assessee gets, in addition:

  • 20% of the actual cost in the year of acquisition and use; or
  • 10% in that year if used for less than 180 days, and 10% more in the next year.

It is not allowed for ships and aircraft, plant that was used by another person before, plant installed in office premises or residential accommodation (including a guest house), office appliances, road transport vehicles, or assets whose whole cost is allowed as a deduction. An individual or HUF in the new regime cannot claim it (section 202(2)(a)(vi)).

Unabsorbed depreciation (section 33(11))

If profits before depreciation are less than the depreciation allowable:

  • depreciation is allowed to the extent of the profits (if there is a loss, none is allowed);
  • the balance is carried forward and added to the depreciation allowable in the next year, and so on, without any time limit; and
  • effect is given first to the brought-forward business loss under section 112(3).

Examples

1. Plant block. Opening WDV ₹10,00,000. In the year you buy plant for ₹2,00,000 and use it for 100 days.

  • Opening block: 15% × 10,00,000 = ₹1,50,000
  • Addition (less than 180 days): 7.5% × 2,00,000 = ₹15,000
  • Depreciation: ₹1,65,000. Closing WDV = 10,00,000 + 2,00,000 - 1,65,000 = ₹10,35,000.
  • If the plant is new and for a manufacturing business, additional depreciation of 10% × 2,00,000 = ₹20,000 is allowed this year, and ₹20,000 next year, other than for individuals in the new regime.

2. Laptop. A laptop costing ₹60,000 is bought in June and used for the rest of the year (more than 180 days). Depreciation at 40% = ₹24,000. WDV = ₹36,000. If bought in January and used for 70 days, depreciation is 20% = ₹12,000.

3. Car. A car for the proprietor’s business costs ₹10,00,000, in use throughout the year. Depreciation at 15% = ₹1,50,000. Taxis used on hire are at 30%.

4. Unabsorbed depreciation. Profit before depreciation ₹3,00,000, depreciation due ₹5,00,000. Depreciation of ₹3,00,000 is allowed and ₹2,00,000 is carried forward, to be added to next year’s depreciation.

Presumptive taxpayers

A presumptive taxpayer under section 58 is deemed to have claimed depreciation every year, and the written down value is computed on that basis (section 58(6)). No separate depreciation is claimed (see our post on presumptive taxation).

Practical points

  1. Keep a fixed asset register by block, with the date of purchase and the date of first use (for the 180 day test).
  2. Do not mix tax depreciation with the book depreciation under the Companies Act, 2013. The tax is the block system above.
  3. Sale of an asset reduces the block’s WDV; if the sale price exceeds the block’s WDV plus additions, a short-term capital gain arises, as in our post on depreciable assets.

Frequently asked questions

What are the income tax depreciation rates?

Under Appendix I to Rule 25: residential buildings 5%, other buildings 10%, temporary erections 40%, furniture and fittings 10%, plant and machinery 15%, motor cars (not on hire) 15%, buses, lorries and taxis used on hire 30%, computers including software 40%, and know-how, patents, copyrights, trademarks, licences and franchises 25%, each on the written down value of the block.

Is depreciation allowed on land?

No. Section 33(1) covers buildings, machinery, plant and furniture, and specified intangible assets. Land and goodwill are not depreciable assets.

What if I use an asset for less than 180 days?

If the asset was acquired in the year and used for less than 180 days, the deduction is 50% of the prescribed rate (section 33(4)).

What is additional depreciation?

An extra 20% of the actual cost of new plant or machinery in the year it is acquired and put to use, for a business of manufacture or production, or generation, transmission or distribution of power; 10% in that year and 10% next year if used for less than 180 days (section 33(8) and (9)). Individuals taxed in the new regime cannot claim it (section 202(2)).

Can I skip claiming depreciation?

No. Section 33(7) says the section applies whether or not you claim depreciation, so the WDV is reduced by the depreciation allowable.

What is unabsorbed depreciation?

Depreciation that cannot be set off because profits are too low. It is added to the depreciation of the next year, with no time limit, after the business loss carry forward under section 112 is given effect (section 33(11)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Books of Account and Tax Audit: Sections 62 and 63, Form 26 and the New Fee (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 20 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A business must keep books of account if its income is more than ₹1,20,000 or turnover more than ₹10 lakh in any of the previous three years (₹2,50,000 and ₹25 lakh for an individual or HUF); a specified profession must keep prescribed books (section 62).
  • A tax audit is needed if business turnover exceeds ₹1 crore (₹10 crore if cash receipts and cash payments are each 5% or less), if professional receipts exceed ₹50 lakh, or if a presumptive taxpayer declares less than the presumptive profit (section 63).
  • The audit report goes in Form 26 and is due one month before the return due date; for audited cases that is 30 September.
  • The Finance Act, 2026 replaced the penalty for failing to get accounts audited with a fee of ₹75,000 for a delay up to one month and ₹1,50,000 thereafter (section 428(c)).

Two compliance duties apply to people with business or professional income: keeping books, and, above certain limits, getting the accounts audited by an accountant. They are in sections 62 and 63 of the Income-tax Act, 2025 (earlier 44AA and 44AB). The Finance Act, 2026 also changed the consequence of missing the audit.

Books of account (section 62)

Who must keep books (section 62(1) and (2))

Person Condition
A person carrying on a specified profession Always (subject to the exception in Rule 46(3) below)
Any other person carrying on business or profession Income from the business or profession exceeds ₹1,20,000, or turnover or gross receipts exceed ₹10 lakh, in any one of the three years before the tax year; or for a new business, the income or receipts are likely to exceed those figures
An individual or HUF The same, but with the limits of income ₹2,50,000 and turnover or gross receipts ₹25 lakh
A presumptive taxpayer under section 58 who claims a lower profit than the deemed profit Always

Specified professions (section 62(4)): legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology, company secretary, and others the Board notifies.

What books (Rule 46): books that enable the Assessing Officer to compute total income. A person carrying on a legal, medical, engineering or architectural profession, accountancy, technical consultancy, interior decoration, as authorised representative or as a film artist must keep:

  • a cash book;
  • a journal, if the accounts are on the mercantile system;
  • a ledger;
  • copies of bills or receipts issued for sums of ₹250 or more;
  • original bills and receipts for expenditure of ₹250 or more; and
  • payment vouchers for smaller expenditure, where the cash book lacks adequate particulars.

These specified books are not required if gross receipts in the profession did not exceed ₹1,50,000 in any of the three preceding years, or, for a new profession, are not likely to exceed that in the year (Rule 46(3)).

Tax audit (section 63)

A person carrying on business or profession must get his accounts audited by an accountant as defined in section 515(3)(b) before the specified date if:

Case Condition
Business Total sales, turnover or gross receipts exceed ₹1 crore in the tax year
Business, with low cash The limit is ₹10 crore instead of ₹1 crore if (i) cash receipts are not more than 5% of total receipts, and (ii) cash payments are not more than 5% of total payments
Profession Gross receipts exceed ₹50 lakh in the tax year
Presumptive taxpayer A person under section 58 (Table serial 1 or 3) whose profits are claimed to be lower than the presumptive profit

For these purposes, payments and receipts by a cheque or draft that is not an account payee instrument are treated as cash (section 63(5)(b)).

No audit if the presumptive profit is declared (section 63(2)). A presumptive taxpayer who declares profits as per section 58 does not need an audit.

Audit under another law (section 63(4)). If you must get the accounts audited under another law (a company, an LLP or a co-operative society, for example), it is enough to get it done under that law before the specified date and to furnish that report with the accountant’s report in the prescribed form.

The specified date and the form

  • Specified date (section 63(5)(a)): one month before the due date of the return under section 263(1). For an audited person, the due date is 31 October, so the specified date is 30 September. Where a transfer pricing report is needed and the due date is 30 November, it is 31 October.
  • Form (Rule 47): Form 26, Part A where the person is audited under another law, Part B otherwise, with the particulars required under section 63 in Parts C and D.
  • Revised report: the audit report can be revised by getting a revised report from the accountant, to be furnished before the end of the financial year following the tax year, if a payment made after the report requires the disallowance under section 35 or section 37 to be recalculated (Rule 47(3)).

Consequence of default: a fee (section 428(c))

For the failure to get accounts audited and furnish the report under section 63, the Finance Act, 2026 provides a fee, not a penalty, from 1 April 2026:

Delay Fee
Up to one month ₹75,000
Longer ₹1,50,000

Before 1 April 2026, the penalty was the lower of 0.5% of turnover and ₹1,50,000 (old section 446). The fee on a transfer pricing report (section 172) is ₹50,000 and ₹1,00,000 on the same pattern (section 428(d)).

Examples

1. Trader. Turnover is ₹1,80,00,000, cash receipts are 3% and cash payments are 2%. Because both are within 5%, the limit is ₹10 crore, so no audit is needed. If cash payments were 8%, the limit is ₹1 crore and an audit is required.

2. Doctor. Gross receipts are ₹55,00,000. They exceed ₹50 lakh, so an audit is required, unless the presumptive scheme at 50% is used and the profit declared is the presumptive profit (the limit under section 58 is ₹50 lakh, or ₹75 lakh with low cash, so he can use it if cash receipts are at most 5%).

3. Small trader on presumptive income with turnover of ₹90 lakh declaring 8%/6% profit: no audit and no books. If he declares 4% and his income is above the exemption limit, he needs books and an audit.

Practical points

  • Count turnover carefully. Include all sales and receipts of the business, not just those in the main ledger, and watch the 5% cash tests when you are close to the limit.
  • Appoint the auditor early. The report is due on 30 September for most audited persons, one month before the return, and the return depends on it.
  • Penalty and fee are different from interest. Late filing of the return has its own fee under section 428(a) and interest under section 423.

Frequently asked questions

Who must get a tax audit?

A person with business turnover above ₹1 crore in the tax year, or ₹10 crore if cash receipts and cash payments are each at most 5%; a professional with gross receipts above ₹50 lakh; and a presumptive taxpayer under section 58 who declares profit lower than the presumptive profit (section 63(1)).

What is the ₹10 crore condition?

The limit is ₹10 crore instead of ₹1 crore if the cash received (including for sales) is not more than 5% of the total received, and the cash paid is not more than 5% of total payments. A cheque or draft that is not account payee is treated as cash (section 63(5)(b)).

What is the due date for the audit report?

The specified date: one month before the due date of the return under section 263(1). Since the return of an audited person is due on 31 October, the report is due by 30 September (31 October if a transfer pricing report is needed and the return is due on 30 November).

What is the penalty for not getting accounts audited?

From 1 April 2026 there is a fee, not a penalty: ₹75,000 for a delay up to one month and ₹1,50,000 after that (section 428(c)). Earlier, the penalty was the lower of 0.5% of turnover and ₹1,50,000.

Which form is the audit report?

Form 26 of the Income-tax Rules, 2026: Part A where the person is audited under another law, and Part B otherwise; Parts C and D carry the particulars required under section 63 (Rule 47).

Who must keep books of account?

A person with a business or profession whose income exceeds ₹1,20,000 or turnover exceeds ₹10 lakh in any of the three preceding years (₹2,50,000 and ₹25 lakh for an individual or HUF), and every person carrying on a specified profession (section 62).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Income Tax Return of a Deceased Person: Legal Heir’s Duties, Liability and Refund (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 19 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • When a person dies, his legal representative is liable to pay any tax the deceased would have owed, and proceedings against the deceased continue against the legal representative (section 302 of the Income-tax Act, 2025).
  • The legal representative is deemed an assessee, so the return of the deceased must be furnished by the usual due date and a pending refund is claimed by the legal representative (section 432(2)).
  • Liability is limited to the estate, but a legal representative who creates a charge on or disposes of estate assets while the tax is unpaid becomes personally liable to the value of those assets.
  • Income earned by the heirs after the death is taxed in their own hands.

Death does not end a person’s tax obligations. A return may be due for the year of death and for earlier years, a refund may be waiting, and a notice may arrive months later. The Income-tax Act, 2025 deals with this through the legal representative (section 302).

Who is the legal representative

The person who in law represents the estate of the deceased, such as an executor, administrator or, where there is no will, the heirs who take the estate. A legal representative is deemed to be an assessee for the purposes of the Act (section 302(3)). A will with probate, a succession certificate or a legal heir certificate is the usual evidence of status.

What must be filed

  • The return of income of the deceased for the tax year of death, covering income up to the date of death, if the deceased was required to file under section 263 (for example, income above the exemption limit or foreign assets). The due dates are the same as for any person in that category.
  • Earlier years for which the deceased had not filed a required return.
  • Proceedings continue. Any assessment, reassessment or other proceeding started against the deceased before death is deemed to have been taken against the legal representative and continues from the same stage. A proceeding that could have been taken against the deceased may also be taken against the legal representative (section 302(2)).

The legal representative signs and verifies the return in that capacity. Give the date of death and your relationship in the return, and attach nothing; keep the death certificate, the legal heir certificate or the will and probate on file.

Liability limited to the estate

  • The legal representative is liable to pay any sum that the deceased would have been liable to pay, in the same manner and to the same extent (section 302(1)).
  • The liability is limited to the extent the estate is capable of meeting it (section 302(4)).
  • Exception: a legal representative is personally liable for any tax payable in that capacity if, while the liability remains unpaid, he creates a charge on, disposes of or parts with any asset of the estate that is or comes into his possession. The personal liability is limited to the value of that asset (section 302(5) and (6)).

Practical point: pay or provide for the deceased’s tax before distributing or selling estate assets.

Refund of a deceased person

A person who cannot claim or receive a refund because of death can have it claimed by his legal representative, trustee, guardian or receiver, for the benefit of the person or his estate (section 432(2)). The refund is claimed by furnishing the return (section 433).

What is taxed to the heirs

  • Income earned by the deceased up to the date of death is the deceased’s income and is assessed through the legal representative.
  • Income that accrues after the death (rent from an inherited house, interest on inherited deposits) belongs to whoever holds the asset, which is the heir, in proportion to the share, or the estate while it is not yet distributed.
  • Inheriting an asset is not income. If the heir later sells it, the cost of acquisition is the cost to the previous owner, the deceased (section 73, Table serial 1).

Example

A salaried person dies on 10 November 2026. His salary and interest up to that date, say ₹9,00,000, are taxed through a return for tax year 2026-27, due by 31 July 2027. The employer’s TDS and the advance tax paid are shown in the return. If the tax is less than the TDS, the legal heir claims the refund on behalf of the estate. If there is tax to pay, the estate pays it before assets are distributed.

Common mistakes

  • Treating the death as the end of the matter and ignoring a notice or a pending return.
  • Distributing the estate before the tax is cleared and becoming personally liable.
  • Taxing post-death income as the deceased’s income, or vice versa.

Before you file

  1. Collect the PAN of the deceased, the death certificate and the legal heir certificate or will.
  2. Check the annual information statement and TDS records for the deceased.
  3. File the return as legal representative of the deceased.
  4. Take advice if the estate includes foreign assets or business income.

Frequently asked questions

Who files the return of a person who has died?

His legal representative, who is deemed an assessee for this purpose (section 302(3)). The legal representative files the return the deceased would have had to file, and pays any tax due from the estate.

Does the deceased’s tax liability pass to the heirs?

The legal representative is liable to pay any sum the deceased would have owed, but only to the extent the estate of the deceased is capable of meeting it (section 302(1) and (4)).

Can a legal heir be personally liable?

Yes, if while the tax remains unpaid he creates a charge on, disposes of or parts with any assets of the estate that are or come into his possession. The liability is limited to the value of those assets (section 302(5) and (6)).

Who gets the refund of a deceased person?

The legal representative, trustee, guardian or receiver, who may claim or receive it for the benefit of the person or his estate (section 432(2)).

Is the deceased’s income taxed in the heirs’ hands?

Income of the deceased up to the date of death is taxed as his income and assessed through the legal representative. Income that arises from the estate after the death is the income of the heirs or of the estate, depending on the succession, and is taxed accordingly.

Do pending notices continue after death?

Yes. A proceeding taken against the deceased before death is deemed taken against the legal representative and continues from the stage it had reached, and any proceeding that could have been taken against the deceased may be taken against the legal representative (section 302(2)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Presumptive Taxation Under Section 58: Businesses, Goods Transporters and Professionals (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 22 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 58 of the Income-tax Act, 2025 combines the old sections 44AD, 44AE and 44ADA: a resident individual, HUF or firm (other than an LLP) can declare income at a fixed percentage of receipts instead of keeping full accounts.
  • For a business, income is 6% of receipts received in banking or online mode and 8% of the rest, if turnover is up to ₹2 crore (₹3 crore if cash receipts are at most 5%); for a specified profession, 50% of gross receipts up to ₹50 lakh (₹75 lakh if cash is at most 5%).
  • For goods carriages (up to ten vehicles), income is ₹1,000 a ton a month for heavy vehicles and ₹7,500 a month for others.
  • Declaring a lower profit than the presumptive figure means books and a tax audit if total income is above the exemption limit; opting out and in again locks you out for five years.

Small businesses and professionals can pay tax without keeping detailed accounts, by declaring a fixed share of their receipts as profit. In the 1961 Act these were three sections: 44AD (small business), 44AE (goods carriages) and 44ADA (professionals). The Income-tax Act, 2025 puts them in one section, section 58. The rules are the same in substance, except that the Finance Act, 2026 dropped one condition (that no deduction under section 144 is claimed).

The three presumptive cases (section 58(2))

Case Who Limit on receipts Income taken as
1. Any business other than goods carriage business Eligible assessee Up to ₹2 crore; or up to ₹3 crore if cash receipts are 5% or less of total turnover The higher of: (i) 6% of turnover received by specified banking or online mode during the tax year or before the due date for the return plus 8% of the remaining turnover; or (ii) the profit actually earned
2. Plying, hiring or leasing goods carriages A person who owns not more than ten goods carriages at any time in the year No turnover limit The higher of: (i) for a heavy goods vehicle, ₹1,000 per ton of gross vehicle weight or unladen weight per month or part of month, and for any other goods carriage ₹7,500 a month; or (ii) profit actually earned
3. Specified profession (section 62(4)) Specified assessee Up to ₹50 lakh; or up to ₹75 lakh if cash receipts are 5% or less of gross receipts The higher of 50% of gross receipts or the profit actually earned

A heavy goods vehicle is one with a gross vehicle weight above 12,000 kg. A person in possession of a goods carriage on hire purchase or instalments is treated as its owner (section 58(11)).

Who is eligible (section 58(11))

  • Eligible assessee (case 1): a resident individual, HUF or firm other than an LLP who has not claimed a deduction under Chapter VIII-C for the year, does not carry on a specified profession, does not earn commission or brokerage, and does not carry on an agency business.
  • Specified assessee (case 3): a resident individual or a firm other than an LLP.
  • A company, an LLP and a non-resident cannot use cases 1 and 3. Case 2 is open to any assessee who owns not more than ten goods carriages.

Specified professions (section 62(4)): legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology, company secretary, and any other profession notified by the Board.

Banking or online mode

Digital receipts are those by an account payee cheque or bank draft, by electronic clearing through a bank account, or by another prescribed electronic mode (section 66(32)). A cheque or draft that is not account payee is treated as cash (section 58(9)). Receipts up to the due date for the return count as digital if made by that date.

Other rules

  • No further deductions (section 58(4)): no loss, allowance or deduction is allowed against the presumptive income. All business expenses, including depreciation, interest and salaries, are deemed covered.
  • Firms (section 58(5)): for goods carriages, a firm deducts the salary and interest paid to its partners, within the limits of section 35(e).
  • Written down value (section 58(6)): the written down value of an asset used in the business is computed as if depreciation had been claimed and allowed each year, which matters if you leave the scheme or sell the asset.
  • Books and audit not needed (section 58(10)): sections 62 and 63 do not apply to the goods carriage business.

Declaring a lower profit

An assessee can claim that the profits actually earned are lower than the presumptive figures. If he does so and his total income exceeds the basic exemption limit, he must keep books of account under section 62 and get them audited under section 63 (section 58(3)). See our post on books of account and tax audit.

The five year lock-out (section 58(7) and (8))

If an eligible assessee declares presumptive profit for a year under case 1 and in any of the next five years declares profit lower than that, without following the section, he cannot use the section for five tax years after the year in which he did so. In those years, if his total income exceeds the exemption limit, he must keep books and get an audit.

Examples

1. Trader. Turnover ₹1,50,00,000, of which ₹1,20,00,000 was received by bank transfer and ₹30,00,000 in cash.

  • Digital receipts at 6% = ₹7,20,000
  • Other receipts at 8% = ₹2,40,000
  • Presumptive income = ₹9,60,000, unless actual profit is higher.
  • Turnover is within ₹2 crore, so the scheme applies. If cash were more than 5% of turnover and turnover above ₹2 crore, it would not.

2. Professional. A chartered accountant has gross receipts of ₹40,00,000. Presumptive income is 50% = ₹20,00,000. Where gross receipts are ₹60,00,000 with cash up to 5%, the scheme still applies (limit ₹75 lakh); with cash above 5% it does not (limit ₹50 lakh).

3. Transporter. Owns 2 heavy vehicles of 16 tons gross weight and 1 light goods vehicle, all for the whole year.

  • Heavy: 1,000 × 16 × 12 = ₹1,92,000 each, for two: ₹3,84,000
  • Light: 7,500 × 12 = ₹90,000
  • Presumptive income = ₹4,74,000, unless actual profit is higher.

Return form

A resident individual, HUF or a firm other than an LLP with presumptive income can file SUGAM (ITR-4) if they also meet the other conditions of Rule 164(6): no foreign assets or income, no directorship, no unlisted shares, total income up to ₹50 lakh, no more than two house properties, and no brought forward loss or loss to carry forward (see our post on which ITR form to file). The due date is 31 August if the accounts are not audited, and 31 October if they are audited.

Choosing: presumptive or full accounts

Point Presumptive Full accounts
Books Not required (unless you declare a lower profit) Required (section 62 conditions)
Audit Not required Required if turnover is above the limits
Expenses Not claimed Claimed in full
Loss Not available Can be carried forward
Best when Real margins are below the presumptive percentage Real margins are lower, or you want to claim losses

If your real profit is below the presumptive percentage and you have high expenses or losses, full accounts may reduce tax, but remember the books and audit costs.

Frequently asked questions

Who can opt for presumptive taxation?

A resident individual, HUF or firm other than an LLP (the “eligible assessee”), who has not claimed any deduction under Chapter VIII-C for the year, does not carry on a specified profession, and does not earn commission or brokerage or carry on any agency business. A “specified assessee” (resident individual or firm other than an LLP) can use the scheme for specified professions (section 58(11)).

What is the limit for business turnover?

₹2 crore, or ₹3 crore if cash receipts do not exceed 5% of total turnover. Receipts by a cheque or draft that is not account payee are treated as cash (section 58(9)).

How is business income worked out?

6% of the turnover received in specified banking or online mode during the year or before the return due date, plus 8% of the remaining turnover, or the profit actually earned if higher (section 58(2), Table serial 1).

How much do professionals declare?

50% of gross receipts, or the actual profit if higher, if gross receipts are up to ₹50 lakh (₹75 lakh if cash receipts are at most 5%). The scheme covers legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology and company secretary professions, and others notified (section 62(4)).

Can I claim a lower profit?

Yes, but you must then keep books of account and get them audited if your total income exceeds the basic exemption limit (section 58(3)).

What if I leave the scheme?

If you declare presumptive profit for a year and then, in any of the next five years, declare a lower profit without following the scheme, you cannot use the scheme for the five years after that year, and you must keep books and get an audit if income exceeds the exemption limit (section 58(7) and (8)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Sale of Depreciable Assets: Capital Gains Under Sections 74 and 75 (Earlier 50 and 50A)

Posted on by CA Meet Dhrangadhariya

Last updated: 13 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • When an asset in a block of assets on which depreciation has been allowed is sold, a capital gain arises only if the sale price exceeds the opening written down value of the block plus additions of the year plus the expenses of transfer (section 74(2)).
  • The excess is a short-term capital gain, whatever the holding period; if the block ceases to exist because all its assets are sold, the net result is also a short-term gain or loss (section 74(3)).
  • Where depreciation was allowed on an asset in a particular year, its written down value is taken as the cost of acquisition (section 75).
  • The tax is at the assessee’s slab rate or at the short-term rate, not at 12.5%.

A business that sells machinery, a vehicle or a building on which it has claimed depreciation does not compute the gain asset by asset, as it would for shares. The Income-tax Act, 2025 treats such assets in blocks, and sections 74 and 75 (earlier sections 50 and 50A) provide the special rules.

What is a block of assets

Depreciation is allowed on a block of assets: assets of the same class with the same depreciation rate. The block has an opening written down value (WDV) each year, which is reduced by depreciation and by the sale proceeds of assets sold, and increased by the cost of assets acquired.

Section 74(2): gain when part of a block is sold

If, during the tax year, the full value of consideration received or accruing for the transfer of one or more assets in a block exceeds the total of:

  • (a) the expenditure incurred wholly and exclusively on the transfer;
  • (b) the written down value of the block at the start of the tax year; and
  • (c) the actual cost of any asset of the block acquired during the tax year,

then the excess is deemed to be a short-term capital gain, irrespective of how long the asset was held. The gain is charged in the year of the sale.

If the sale price is less than or equal to this total, there is no capital gain under this section, and the sale is dealt with under the depreciation provisions for the block.

Example. The WDV of a block of machinery at the start of the year is ₹10,00,000. During the year, you buy a machine of the same block for ₹2,00,000 and sell an old machine for ₹14,00,000 (expenses ₹20,000).

  • Total = 20,000 + 10,00,000 + 2,00,000 = ₹12,20,000
  • Sale price ₹14,00,000 is more than ₹12,20,000, so short-term capital gain = ₹1,80,000

Section 74(3): the block ceases to exist

If all the assets of a block are transferred in the year, so that the block ceases to exist:

  • the cost of acquisition of the block is the WDV at the beginning of the year plus the actual cost of any asset of the block acquired during the year; and
  • the amount received or accruing is deemed a short-term capital gain (or a short-term loss, if it is less than that cost less the expenses).

Example. A block has a WDV of ₹6,00,000 and is entirely sold for ₹4,50,000 with no additions. The result is a short-term capital loss of ₹1,50,000 (less expenses). The loss is a capital loss and is dealt with under the loss rules (see our post on capital loss), not as a business loss.

Section 75: where depreciation was obtained on an asset

If depreciation has been obtained under section 33(2) for a capital asset in any tax year, then sections 72 and 73 apply with the modification that the written down value of the asset, as defined in section 41 and adjusted, is its cost of acquisition. This avoids a double benefit: the depreciation already claimed is not allowed again as a cost.

Who these provisions affect

  • Businesses and professions that claim depreciation (plant, machinery, vehicles, furniture, buildings, intangible assets).
  • Goodwill: if you bought goodwill and claimed depreciation before the tax year commencing 1 April 2020, the depreciation reduces the purchase price for its cost of acquisition (section 90(4)).

Tax and reporting

  • The gain is short-term and is taxed at the slab rates (individuals), or the rates for the entity (company, firm).
  • Report the gain in the capital gains schedule under short-term gains, with the block details.
  • Advance tax applies to the gain as it arises.

Points to remember

  1. The holding period does not matter: the gain is short-term.
  2. A gain arises only when the sale price exceeds the whole block’s WDV plus additions plus expenses.
  3. When a block disappears, a loss on its sale is a short-term capital loss, which can be set off only against capital gains.
  4. Keep the depreciation schedule to prove the WDV.

Frequently asked questions

How is a gain on a depreciable asset computed?

If the sale price of one or more assets of a block exceeds the total of the expenses of transfer, the written down value of the block at the start of the year and the cost of assets of the block bought during the year, the excess is a short-term capital gain (section 74(2)).

Is the gain long-term if I held the machine for many years?

No. The excess is deemed to be a short-term capital gain irrespective of the holding period (section 74(2)).

What if all assets in the block are sold?

The block ceases to exist. Its cost of acquisition is the written down value at the start of the year plus the cost of assets of that block bought during the year, and the net result is a short-term capital gain or loss (section 74(3)).

What happens if the sale price is lower than the block’s written down value?

No capital gain arises under section 74(2). The sale is dealt with under the depreciation provisions for the block, unless the block ceases to exist, in which case section 74(3) gives a short-term loss.

Does section 75 apply to every asset?

It applies where depreciation was obtained under section 33(2) for a capital asset in any tax year: the written down value of the asset as defined in section 41, as adjusted, is its cost of acquisition for sections 72 and 73.

What tax rate applies?

Short-term capital gain rates. Since the transaction is not on a stock exchange with STT, the gain is taxed at the assessee’s slab rates (or the rate of the entity).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Deferred Tax Asset and Deferred Tax Liability

Posted on by CA Meet Dhrangadhariya

Last updated: 11 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Deferred tax is the tax effect of timing differences between book profit and taxable profit. It is an accounting item, not a separate tax.
  • Book profit higher than taxable profit creates a deferred tax liability (DTL). Taxable profit higher than book profit creates a deferred tax asset (DTA).
  • Permanent differences, such as penalties, create no deferred tax.
  • DTA on losses and unabsorbed depreciation needs virtual certainty; the note also covers MAT, tax holidays, presentation and worked examples.

How deferred tax arises

1. Compute book profit from the financial statements
↓
2. Compute taxable profit under the Income Tax Act
↓
3. Compare the two and separate reversible timing differences from permanent differences
↓
4. Ignore permanent differences, they create no deferred tax
↓
5. Book profit higher than taxable profit: create a deferred tax liability
↓
6. Taxable profit higher than book profit: create a deferred tax asset (for losses and unabsorbed depreciation only with virtual certainty)
↓
7. Reassess the balances at every balance sheet date

Deferred tax is an accounting item, covered under IND AS 12 - Income Taxes. It is the tax benefit that can be availed in the future years or the additional liability needing to be paid in the future years, depending on the various factors. Deferred tax arises as a result of temporary differences between income as per books of accounts and income as per income tax computation.

When the income computed as per income tax act is greater than profits calculated as per accounting standards, the difference between those two result in Deferred Tax Asset (DTA). Else, the difference is treated as Deferred Tax Liability (DTL).

Note: from 1 April 2026 the Income-tax Act, 2025 replaces the Income-tax Act, 1961 and section numbers have changed. Section numbers quoted below are those of the 1961 Act.

What is Deferred Tax?

The tax effect due to the temporary timing differences is termed as deferred tax which literally refers to the taxes postponed. Deferred tax is recognized only on temporary timing differences.

Timing Difference

  • Company derives its book profits from the financial statements prepared in accordance with the rules of the Companies Act and calculates its taxable profit based on provision of the Income Tax Act.
  • There is a difference between the book profit and taxable profit, because of certain items which are specifically allowed or disallowed for tax purposes each year.
  • This difference between the book and the taxable income or expense arises from items that are treated differently for book and tax purposes. It can be of two kinds:
  • Timing (temporary) difference: arises in one period and reverses in a later period, for example depreciation charged at different rates in books and for tax.
  • Permanent difference: never reverses, for example a penalty that is never allowed as a deduction. It creates no deferred tax.

Types of Deferred Tax

Deferred tax are classified into two:

  • Deferred Tax Liability
  • Deferred Tax Asset

Deferred Tax Liability

When the accounting income is more than the taxable income, the tax payable now is lower than the tax on the book profit. The company pays less tax now and more tax in future, so the difference is a liability.

For example, higher depreciation claimed for tax than in the books, or income recognised in the books that becomes taxable only in a later year.

Deferred Tax Asset

When the taxable income is more than the accounting income, the company pays more tax now than the book profit suggests. It expects to pay less tax in future, so the difference is an asset.

For example, higher depreciation in the books than for tax, provision for doubtful debts, gratuity and leave encashment (allowed for tax only when paid or written off), advance income that is taxed on receipt but recognised in the books later, and notional losses disallowed under the Income Tax Act.

A tabular explanation of the above concepts is provided below for easy reference:

S No Entity Profit Status Entity - Current Entity - Future Effect
1 Book profit higher than the Taxable profit Pay less tax now Pay more tax in future Creates Deferred Tax Liability (DTL)
2 Book profit is less than the Taxable profit Pay more tax now Pay less tax in future Creates Deferred Tax Asset (DTA)

Example of Deferred Tax Asset and Liability

DTA - Suppose, book profit of an entity before taxes is Rs 1,000 and this includes provision for bad debts of Rs.200.

For the purpose of tax profit, bad debts will be allowed in future when it’s actually written off. Hence taxable income after this disallowance will be Rs. 1200 and let’s say income tax rate is 20% then the entity will pay taxes on Rs. 1200 i.e (1200*20%) Rs. 240.

If bad debts were not disallowed, entity would have paid tax on Rs. 1000 amounting Rs 200 i.e 1000*20%. For the additional Rs. 40 which is already paid now, we have to create DTA. Entry for recording the DTA is as under:

  • Deferred Tax Asset Dr                    40
  • To Deferred Tax Expense Cr        40

(Being DTA of Rs. 40 accounted in the books)

DTL - Common example of DTL would be depreciation. When the depreciation rate as per the Income tax act is higher than the depreciation rate as per the Companies act (generally in the initial years), entity will end up paying less tax for the current period. This will create deferred tax liability in the books:

There are no DTA or DTL provisions made for permanent differences. E.g. Fines and penalties which are part of book profits but are not allowed for tax purposes.

Deferred tax implications on Unabsorbed Depreciation and Carry Forward of Losses

  • With respect to timing differences related to unabsorbed depreciation or carry forward losses, DTA is recognized only when the company reliably estimates sufficient future taxable income.
  • This test for virtual certainty has to be done every year on balance sheet date and if the condition is not fulfilled, such DTA/DTL should be written off.

While computing future taxable income, only profits pertaining to business and profession should be considered and not the income from other sources.

Example for Virtual Certainty

  • A projection of future profits prepared by an entity based on the future restructuring, sales estimation, future capital expenditure past experience etc., which are submitted to banks for loan is concrete evidence for virtual certainty.
  • But virtual certainty cannot be convincing if it’s only based on some binding export order which has the risk of cancellation anytime.
  • Virtual certainty must be based on projections that are more likely in future.

Presentation in Financial Statements

DTA is presented under non-current assets and DTL under the head non-current liability. Both DTA and DTL can be adjusted with each other provided they are legally enforceable by law and there is an intention to settle the asset and liability on a net basis.

Illustration on DTA/DTL Calculation

Let’s understand how DTA/DTL is created in books with a simple example (amount in lacs):

Particulars For Book For Tax Difference (DTA)/DTL @30%
Income 1000 800 200
Opening Balance of (DTA)/DTL - - - -
Depreciation 100 200 100 30
Sales Tax payable 50 0 (50) (15)
Leave encashment 200 100 (100) (30)
Closing balance of (DTA)/DTL - - - (15)

Current tax on Taxable income is 800*30% = 240

Deferred tax as per above = (15)

Net tax effect = 225

*The 30% rate is used only for illustration. Use the rate that actually applies to the entity for the year, for example the lower rates under sections 115BAA and 115BAB for companies, or the slab rates for individuals.

Effect on Tax Holiday With Respect To DTA/ DTL

A tax holiday is a benefit that exempts the profits of certain undertakings for a fixed period. A current example is section 10AA for units in Special Economic Zones, which is available only to units that began activity on or before 31 March 2020. The older holidays under sections 10A and 10B have been phased out.

Deferred tax (DT) from the timing difference that reverses during the tax holiday period should not be recognised during the enterprise’s tax holiday period. DT related to the timing difference that reverses after the tax holiday has to be recognised in the year of origination.

Illustration for Tax Holiday

A Ltd. is an undertaking whose profits are exempt for a tax holiday period that ends after Year 5. It has a timing difference on account of depreciation as follows: (Assume tax rate is 30%)

Year Timing Difference - Depreciation
1 2 lakhs
2 3 lakhs

In the case of tax-free companies, deferred tax liability is not recognised, for the timing differences that originate and reverse in the tax holiday period. Deferred tax liability is created only when the timing differences originate in the tax holiday period and reverse after the tax holiday. Adjustments are done on the basis of the FIFO method.

Suppose in the above example of the Rs 200,000, Rs 80,000 reverses within the tax holiday period, so DTL is created only on the balance. DTL will be created as given below:

Year Timing difference DTL @ 30%
1 120,000 (200,000-80,000) 36,000
2 300,000* 90,000

*Fully reversed after the tax holiday period. The total DTL balance at the end of the second year will be 126,000.

Effect of DTA/DTL on MAT

MAT is Minimum Alternate Tax which a company is required to pay if its tax payable as per normal provision of the income tax act is less than the tax computed at 15% of the book profit (plus surcharge and cess; the rate was 18.5% before AY 2020-21). MAT is levied under section 115JB of the income tax act; companies that opt for the concessional regimes under sections 115BAA and 115BAB do not pay MAT and it is calculated using the entity’s book profit as under: Book profit is increased by the following:

  • Income tax paid or provision
  • An amount carried to any reserve
  • Provisions made for unascertained liabilities
  • Deferred tax provision etc

And it is decreased by the following:

  • Amount withdrawn from any reserve or provision
  • Depreciation debited to P&L (except revaluation depreciation)
  • Lower of Loss brought forward or unabsorbed depreciation
  • Deferred tax credited to P&L etc.

There are controversies if deferred tax liability debited to P&L should be added to the book income for the purpose of MAT calculation. Kolkata Tribunal in Balrampur Chini’s case has held that the deferred tax liability should not be added back whereas the Chennai Tribunal in Prime Textiles Ltd case has held otherwise.

“Deferred tax charge is not a provision for tax but is a provision for tax effect for difference between taxable income and accounting income and further that deferred tax charge cannot be termed as income-tax paid or payable, which has to be paid out of the profit earned. Reserves mentioned in Section 115JB are different, it can be unilaterally transferred back to P&L account or can be utilised for issuing bonus shares etc. However, amounts created towards deferred tax charge cannot be so transferred or utilized”

“The Chennai Tribunal observed that AS-22 is mandatory as per Section 211(3) of the Companies Act, 1956, however, the same is not notified by the Central Government under Section 145(2) of the IT Act. Moreover, the deferred tax liability cannot be considered as ascertained liability and therefore, assessing officer has every power to make adjustment on this account as it cannot be termed as tinkering of audited accounts prepared in accordance with the provisions of the Companies Act.”

These rulings show that tribunals have taken different views. Check the current wording of Explanation 1 to section 115JB, and the equivalent provision of the Income-tax Act, 2025, before relying on either view.

Whether MAT credit can be considered as a Deferred Tax Asset per AS 22?

  • As per AS 22, deferred tax assets and liability arise due to the difference between book income & taxable income and do not rise on account of tax expense itself.
  • MAT does not give rise to any difference between book income and taxable income.
  • It is not appropriate to consider MAT credit as a deferred tax asset in accordance with AS 22.
  • MAT credit is separately recognized as an asset (MAT credit entitlement) in the books, not as a Deferred Tax Asset.
  • Under Ind AS 12, unused tax credits, which include MAT credit, can be recognised as a deferred tax asset to the extent it is probable they will be used. The answer therefore differs between AS 22 and Ind AS 12.

Key takeaways

  1. Deferred tax is an accounting concept and not a direct tax provision, this might arise because of difference in the accounting profit and taxable profits.
  2. Deferred tax liability would arise when a company would pay less tax at present but expected to pay higher taxes in future.
  3. Timing (temporary) differences between book income and taxable income create deferred taxes, whereas permanent differences do not result in a DTA or DTL.

Final Word

Deferred tax is often mistaken for a tax concept, but it is actually an accounting concept that reflects the tax impact arising from differences in the treatment of items under financial statements and tax records.

Frequently asked questions

What is the difference between DTA and DTL?

A deferred tax liability arises when book profit is higher than taxable profit, so less tax is paid now and more later. A deferred tax asset arises when taxable profit is higher than book profit, so more tax is paid now and less later.

Is deferred tax created on permanent differences?

No. Only timing (temporary) differences that reverse in later periods create deferred tax. Items such as penalties that are never allowed for tax create no DTA or DTL.

Can a company recognise a deferred tax asset on carried forward losses?

Under AS 22 only when there is virtual certainty, supported by convincing evidence, of sufficient future taxable income. The test is repeated at every balance sheet date.

Is MAT credit a deferred tax asset?

Under AS 22 it is shown separately as MAT credit entitlement and not as a deferred tax asset. Under Ind AS 12 unused tax credits can be recognised as a deferred tax asset if their use is probable.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Home Loan Interest Deduction: Section 22 Rules, Limits and How to Claim (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 08 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Interest on a loan taken to buy, build, repair or renew a house is deductible under section 22(1)(b) of the Income-tax Act, 2025 (earlier section 24(b)); on a let-out house the whole interest is allowed.
  • For a self-occupied house the limit is ₹2,00,000 a year if the house is completed within five years from the end of the tax year in which the loan was taken and the lender gives a certificate; otherwise it is ₹30,000.
  • Interest paid before the year of completion (pre-construction interest) is claimed in five equal instalments from the year of completion, inside the same cap.
  • Under the new regime, interest on a self-occupied house is not allowed, but interest on a let-out house is.

For most people, interest on a home loan is the biggest tax deduction they have. Under the Income-tax Act, 2025 the rule sits in section 22 (it was section 24(b) in the 1961 Act). This post covers who can claim how much, how pre-construction interest works, and what to give your employer and put in your return.

What qualifies

Under section 22(1)(b), interest payable on capital borrowed for acquiring, constructing, repairing, renewing or reconstructing a property is deducted from the property’s annual value. The deduction is for interest payable, whether or not you have paid it. Interest payable outside India is not allowed if tax has not been paid or deducted on it and there is no agent in India (section 22(6)).

Principal repayment is not part of this deduction. It is a separate old regime deduction (see our post on home loan tax benefits).

The limits

Property Limit on interest in a year
Let-out house No limit; the whole interest payable
Self-occupied house (section 21(6)), acquired or constructed with a loan and completed within five years from the end of the tax year in which the loan was taken, with the lender’s certificate ₹2,00,000
Self-occupied house in any other case (for example, delayed completion, or a loan for repairs, renewal or reconstruction) ₹30,000
Total for all self-occupied houses ₹2,00,000 (section 22(5))

The five years: count from the end of the tax year in which you borrowed. A loan taken on 30/04/2026 falls in tax year 2026-27, which ends on 31/03/2027, so the house must be completed by 31/03/2032. Some articles count only four years, so check your own dates.

Certificate: to claim ₹2,00,000 you must furnish a certificate from the lender (section 22(2)(a)(ii)). It must show the interest payable on the capital borrowed and the interest on any new loan taken to repay the whole or part of the original loan (section 22(4)).

Pre-construction interest

While the house is under construction you cannot claim the interest. Interest payable for the period before the tax year in which the property is acquired or completed is claimed later (section 22(1)(c)):

  • in five equal instalments, one in the tax year of acquisition or completion and one in each of the next four tax years;
  • after reducing it by any amount already allowed under another provision of the Act (section 22(3)).

For a self-occupied house, the interest under clauses (b) and (c) together is subject to the ₹2,00,000 cap (section 22(2), as amended by the Finance Act, 2026).

Example. You take a loan to build a house you will let out. The interest payable is ₹90,000 in the first year and ₹1,20,000 in the second year. The house is completed in the third year, when the interest is ₹1,20,000.

  • Pre-construction interest: 90,000 + 1,20,000 = ₹2,10,000, so ₹42,000 a year for five years.
  • Deduction in the third year: 1,20,000 + 42,000 = ₹1,62,000.
  • In the fourth to seventh years: the interest of that year plus ₹42,000.

If the house is self-occupied and the interest of the year is ₹2,10,000, plus ₹42,000 of pre-construction interest, the total of ₹2,52,000 is capped at ₹2,00,000.

Let-out house: no limit, but a loss may arise

On a let-out house the whole interest is deducted after the 30% deduction. If the interest is large, the result is a loss from house property. In the old regime up to ₹2,00,000 of that loss can be set off against income such as salary; the rest carries forward for eight years against house property income. In the new regime the loss cannot be set off against other heads and is not carried forward (sections 109, 110 and 202). See our post on income from house property.

Old and new regime

Point Old regime New regime
Self-occupied house, interest under section 22(1)(b) Up to ₹2,00,000 Not allowed (section 202(2)(a)(v))
Let-out house Whole interest Whole interest
Loss set off against other heads Up to ₹2,00,000 Not allowed
Pre-construction instalment on a self-occupied house Allowed, within the ₹2,00,000 cap Unclear; see below

Section 202(2)(a)(v) names only section 22(1)(b), not the pre-construction clause 22(1)(c). The prudent position is that the self-occupied interest claim is closed in the new regime, but the text does not say so for clause (c). Take advice before claiming pre-construction interest on a self-occupied house in the new regime.

Joint loans and co-owners

Co-owners with definite shares are taxed separately on their own shares of the property, and the relief for a self-occupied house is available to each of them individually (section 24). So each co-owner who is also a borrower and pays interest can claim up to ₹2,00,000 on his or her share, which can give a larger total deduction than a single owner would get. You must be an owner, and the interest you claim should be what you are liable to pay.

How to claim

  1. Get the lender’s interest certificate for the year, showing interest and principal, the loan sanction details and each borrower.
  2. Tell your employer. Give Form 124 with the lender’s name, address and PAN (Rule 205) so TDS is calculated correctly. The employer may reduce TDS only for a loss from house property (section 392(4)(b)), not for other claims.
  3. Keep the possession or completion certificate, to show the date the house was acquired or completed.
  4. Report in the return: in the house property schedule, enter the property details, rent if any, taxes paid, 30% deduction and interest. Enter the pre-construction instalment together with the interest of the year.

Frequently asked questions

How much home loan interest can I claim?

On a let-out house, all the interest payable in the year. On a self-occupied house, up to ₹2,00,000 in a year if the house is acquired or constructed with borrowed capital and completed within five years from the end of the tax year in which the loan was taken, and you hold the lender’s certificate; in any other case, ₹30,000.

When does the five year period start?

From the end of the tax year in which the loan was taken. For a loan taken on 30/04/2026 (tax year 2026-27), the house must be completed by 31/03/2032.

What is pre-construction interest?

Interest payable for the period before the tax year in which the house was acquired or completed. It is claimed in five equal instalments, one in the tax year of completion and one in each of the next four years (section 22(1)(c)).

Is the pre-construction interest over and above the ₹2,00,000?

No. For a self-occupied house the total of the current interest and the pre-construction instalment in a year is capped at ₹2,00,000 (section 22(2), as amended by the Finance Act, 2026).

Can I claim interest on a self-occupied house in the new regime?

No. Section 202(2) disallows the section 22(1)(b) interest on houses covered by section 21(6) in the new regime. Interest on a let-out house is allowed.

What if the loan is refinanced?

Interest on a new loan taken to repay the earlier loan is also deductible, and the lender’s certificate should show it separately (section 22(4)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Crypto and Virtual Digital Assets: 30% Tax, 1% TDS and No Loss Set-Off (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 18 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Income from the transfer of a virtual digital asset (crypto-assets, NFTs and similar tokens) is taxed at a flat 30% under section 194 of the Income-tax Act, 2025, whatever the holding period and whether it is a capital asset or not.
  • Only the cost of acquisition is deducted; no other expense or allowance is allowed, and a loss on one VDA cannot be set off against any other income, including a gain on another VDA, or carried forward.
  • The person paying the consideration for a VDA deducts 1% TDS with no threshold (section 393(1), Table serial 8(vi)).
  • A gift of a VDA above ₹50,000 from a non-relative is taxable in the hands of the receiver.

India taxes cryptocurrency and similar assets under a special regime that is harsher than the rules for shares or property. It is in section 194 of the Income-tax Act, 2025 (earlier section 115BBH), with TDS in section 393. This post sets out how it works for tax year 2026-27.

What is a virtual digital asset

Section 2(111) covers:

  • any information, code, number or token (not Indian or foreign currency), generated through cryptographic means or otherwise, which gives a digital representation of value, with the promise of inherent value or functioning as a store of value or unit of account, and which can be transferred, stored or traded electronically;
  • a non-fungible token (NFT) or any other token of similar nature;
  • any other digital asset notified by the Central Government; and
  • any crypto-asset that is a digital representation of value relying on a cryptographically secured distributed ledger or similar technology to validate and secure transactions.

The Central Government may notify a digital asset to be excluded from the definition.

The tax: section 194(1), Table serial 4

Point Rule
Income covered Any income from the transfer of a virtual digital asset
Who Any person
Rate 30%
Deduction No deduction for expenditure other than the cost of acquisition, if any; no allowance; no set-off of any loss in computing this income
Loss The loss on transfer of a virtual digital asset cannot be set off against income computed under any other provision of the Act, and cannot be carried forward
Transfer The meaning of “transfer” in section 2(109) applies to a virtual digital asset whether or not it is a capital asset

This means:

  • There is no distinction between short-term and long-term, and no benefit of the lower rate or the ₹1,25,000 exemption that applies to shares.
  • Expenses such as exchange fees, brokerage, internet and electricity cannot be deducted.
  • Losses are ring-fenced: a loss on one coin cannot reduce the gain on another coin in the same year, and cannot reduce salary, business or other income.
  • The tax is 30% plus surcharge and 4% cess.

TDS: 1% on payment (section 393(1), Table serial 8(vi))

Any person paying a sum as consideration for the transfer of a virtual digital asset deducts tax at 1%, with no threshold limit. The seller takes credit for the TDS in the return.

Gifts of crypto

A virtual digital asset is “property” for the gift rule in section 92(2)(m). If you receive it from a non-relative without consideration, with an aggregate fair market value above ₹50,000 in a year, or for less than its fair market value by more than ₹50,000, the value is taxed as income from other sources. Gifts from relatives, on marriage, by will or inheritance, and the other cases in section 92(3) are not taxed.

Examples

1. Gain. You buy a token for ₹1,00,000 and sell it for ₹1,80,000.

  • Income from transfer: 1,80,000 - 1,00,000 = ₹80,000
  • Tax: 30% = ₹24,000, plus 4% cess ₹960 = ₹24,960
  • TDS at 1% of ₹1,80,000 = ₹1,800 is credited against this.

2. Loss and gain in the same year. You make a gain of ₹80,000 on one token and a loss of ₹20,000 on another. The tax is on the full ₹80,000, because the loss cannot be set off: 80,000 × 30% = ₹24,000 plus cess. The ₹20,000 loss is lost.

3. Fees. You paid ₹2,000 in exchange fees on example 1. They are not deductible. The income remains ₹80,000.

Reporting

  • Report income from the transfer of virtual digital assets in the return, in the schedule provided for it, even if you made a loss, with the cost, date and sale value of each transfer.
  • Use the return form you are eligible for (see our post on which ITR form to file); this income is normally reported in ITR-2 or ITR-3.
  • Pay advance tax on the gains as they arise.
  • Keep exchange statements, wallet records and bank proofs. If you hold the VDA as a business (a trader), the 30% regime still applies to the transfer income; the cost of acquisition is the only deduction.

Practical advice

  1. Do not plan on losses to reduce tax: they are not usable, so avoid churning to book losses.
  2. Check that the exchange has deducted 1% TDS and that it appears in your TDS statement.

Frequently asked questions

How is crypto taxed in India?

Income from the transfer of a virtual digital asset is taxed at 30% (section 194(1), Table serial 4), with cess. No deduction is allowed for any expense other than the cost of acquisition, and there is no benefit of a lower rate for long holding.

Can I set off a crypto loss?

No. A loss on transfer of a virtual digital asset cannot be set off against income from any other source, including a gain on another virtual digital asset, and cannot be carried forward to later years.

Is there TDS on crypto?

Yes, 1% of the consideration, with no threshold, deducted by the person paying for the transfer of a virtual digital asset (section 393(1), Table serial 8(vi)).

Are NFTs covered?

Yes. A non-fungible token or any other token of similar nature is a virtual digital asset (section 2(111)(b)).

Does it matter whether the asset is a capital asset?

No. For this provision, “transfer” in section 2(109) applies to a virtual digital asset whether or not it is a capital asset (section 194(1)).

What if I receive crypto as a gift?

If you receive a virtual digital asset without consideration, or for a price less than its fair market value, from a person who is not a relative, and the value exceeds ₹50,000 in a year, the value is taxed as income from other sources (section 92(2)(m)). Gifts from relatives, on marriage or by inheritance are not taxed.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.