Nature-Based Expenses explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
An NBFC cannot present cost of sales, distribution costs and administrative expenses. Ind AS 1 permits that analysis; Schedule III's prescribed format does not.
The structure that carries nature-based expenses
Part II contains items I to XVIII which lists items of Revenue, Expenses, Profit / (Loss) and Other Comprehensive Income. The format prescribed is the vertical form wherein disclosures for revenues and expenses have been given in various line items.
The Statement of Profit and Loss is a single statement of profit and loss, with profit or loss and other comprehensive income presented in two sections. The sections are presented together, with the profit or loss section presented first followed directly by the other comprehensive income section. This is in sync with Paragraph 10A of Ind AS 1.
Under Note 2 of the General Instructions, the statement shall include (1) Profit or loss for the period; (2) Other Comprehensive Income for the period — and the sum of (1) and (2) is "Total Comprehensive Income".
The specific format laid down for presentation of various items of Income and Expenses in the Statement of Profit and Loss indicates that expenses should be aggregated based on their nature, which is in sync with Ind AS 1 Paragraph 99. Accordingly, functional classification of expenses is prohibited.
Ind AS 1 itself allows either analysis — by nature or by function. Schedule III removes the choice, and the consequence is that an NBFC's expenses appear as finance costs, impairment on financial instruments, employee benefits expense, depreciation, and other expenses, never as cost of services, distribution costs or administrative expenses.
The reason is comparability. A function-based analysis requires arbitrary allocation of the same underlying costs across activities, and no two entities allocate identically. Nature-based classification asks only what was actually spent, which is verifiable and comparable across the sector.
For a lender there is a second reason. The most important cost line is finance costs — the price of funding — and the second is impairment on financial instruments. Both are meaningless under a functional split, because neither belongs to any single function of the business.
No extraordinary items
Ind AS 1 prohibits an entity from presenting any items of income or expense as extraordinary items, in the statement of profit and loss or in the notes. Accordingly, there are no line items like "Extraordinary items" and "Profit before extraordinary items and tax" in this Schedule.
The Framework definitions behind nature-based expenses
- Income encompasses increases in assets, or decreases in liabilities, that results in increases in equity, other than those relating to contributions from holders of equity claims.
- Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
Both definitions are framed in balance sheet terms and both carve out transactions with owners — which is the same boundary Ind AS 1 paragraph 109 draws for the statement of changes in equity.
The paragraph 82 line items alongside nature-based expenses
Separate line items should be included in the profit or loss section in line with Paragraph 82 of Ind AS 1:
- Revenue, presenting separately interest revenue calculated using the effective interest method;
- Gains and losses arising from the de-recognition of financial assets measured at amortized cost;
- Finance costs;
- Impairment losses (including impairment gains or reversals of impairment losses) determined as per Ind AS 109, Section 5.5;
- Share of profit or loss of associates and joint ventures accounted for using the equity method;
- Any gain or loss arising from a difference between the previous amortized cost of the financial asset and its fair value at the date when the financial asset is reclassified from amortized cost to fair value through profit or loss;
- Any cumulative gain or loss previously recognized in other comprehensive income that is reclassified to profit or loss, when the financial asset is reclassified from FVOCI to FVTPL;
- A single amount for the total of discontinued operations, as per Ind AS 105.
Six of the eight concern financial instruments, which is exactly what one would expect of a format designed for a financial business.
OCI and the one percent rule applied to nature-based expenses
OCI shall be presented as (a) items that will not be reclassified to profit or loss and its related income tax effects; (b) items that will be reclassified to profit or loss and its related income tax effects. Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods.
And in separately disclosing the paragraph 82 items, consideration should be given to Note 5 and Note 9 of the General Instructions, that require disclosure of any item of "Other Income" or "Other Expenses" exceeding one percent of the total income, in addition to the consideration of "materiality". An entity should consider these requirements as mutually exclusive.
Common mistakes
- Replacing nature-based expenses with a cost of sales or administrative expenses analysis.
- Labelling an unusual gain or loss as an extraordinary item.
- Presenting OCI without the reclassifiable and non-reclassifiable split.
- Omitting interest revenue calculated using the effective interest method as a separate line.
Key Facts About Nature-Based Expenses
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
How is the statement structured?
The statement of profit and loss is a single statement with profit or loss and other comprehensive income presented in two sections, presented together, with the profit or loss section first followed directly by the other comprehensive income section — in sync with paragraph 10A of Ind AS 1.
Are extraordinary items permitted?
No. Ind AS 1 prohibits an entity from presenting any items of income or expense as extraordinary items in the statement of profit and loss or in the notes. Accordingly there are no line items like extraordinary items or profit before extraordinary items and tax in this Schedule.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Nature-Based Expenses: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.