Rule 118 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.
Rule 118 of the Income-tax Rules, 2026 reduces a company's section 206(1) liability by (A−B)−(C−D) where past income has entered book profit through an advance pricing agreement or a secondary adjustment.
The problem being solved
An advance pricing agreement under section 168, or a secondary adjustment under section 170, can push income belonging to earlier years into the current year's book profit. Without relief, the company would pay minimum alternate tax on that income at the current year's position, having potentially already been in a tax-paying position on the same profits in the earlier years. Rule 118 removes the difference. The 1962 parallel is rule 10RB.
The formula
| Reduction = (A − B) − (C − D) | |
|---|---|
| A | Tax payable under section 206(1) on the book profit of the tax year including the past income |
| B | Tax payable under section 206(1) on the book profit of the tax year excluding the past income |
| C | Aggregate tax payable under section 206(1) on the book profit of the past year or years referred to in D, after increasing that book profit with the relevant past income of those years |
| D | Aggregate tax payable under section 206(1) on the book profit of those past years to which the past income belongs |
In each of the four, where there is no tax payable, the value shall be taken as zero. And sub-rule (2): if the value of (A−B)−(C−D) is negative, its value shall be deemed to be zero.
(A − B) is the tax the past income attracts now. (C − D) is the tax it would have attracted then, had it been in the book profit of the years it belongs to. Rule 118 gives back the excess of the first over the second — so the company ends up bearing the historic charge, not the current one. Where the past years were more heavily taxed, (C − D) exceeds (A − B), the formula goes negative, and sub-rule (2) floors it at zero: the rule never increases the liability.
What counts as past income
Sub-rule (3): past income is the amount of income of a past year or years included in the book profit of the tax year on account of:
- an advance pricing agreement entered into by the assessee under section 168; or
- a secondary adjustment required to be made under section 170.
Both routes share a feature: the income is referable to identified earlier years. That is what makes C and D computable — the formula needs to know which past years the income belongs to, and what the book profit of those years was.
The effect on tax credit
Sub-rule (4): on application of the relief, the tax credit allowed to the assessee under section 206(1)(m) shall be reduced by the amount allowed under sub-rule (1).
Minimum alternate tax paid generates a credit carried forward against future normal tax. Sub-rule (4) prevents double benefit: the company that takes a rule 118 reduction has its section 206(1)(m) credit reduced by exactly the same amount. The relief is therefore a cash-flow and rate-mismatch correction, not an absolute saving — a point worth modelling before claiming, particularly for a company that expects to be in normal tax and to use the credit soon.
Making the claim
| Element | Requirement |
|---|---|
| Form | Form No. 53 |
| Manner | By uploading a signed printout of the Form in the manner specified by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) |
| Verification | By the person authorised to verify the return of income of the assessee company under section 265 |
The upload-a-signed-printout mechanism is unusual and worth noting operationally: the form is signed physically and then uploaded, so the signatory's availability is on the critical path.
Worked example
| Input | Amount |
|---|---|
| Tax under section 206(1) on current book profit including past income (A) | Rs 9,20,00,000 |
| Tax on current book profit excluding past income (B) | Rs 7,40,00,000 |
| A − B | Rs 1,80,00,000 |
| Aggregate tax on past years' book profit increased by the past income (C) | Rs 5,60,00,000 |
| Aggregate tax on those past years as they stood (D) | Rs 4,45,00,000 |
| C − D | Rs 1,15,00,000 |
| Reduction under rule 118 | Rs 65,00,000 |
| Section 206(1)(m) credit | Reduced by Rs 65,00,000 |
| If (C − D) had been Rs 2,10,00,000 | Formula negative — deemed zero |
Compliance checklist
- Identify the past income and the specific past years it belongs to.
- Confirm it entered book profit through a section 168 advance pricing agreement or a section 170 secondary adjustment.
- Compute A and B on the current year's book profit, with and without the past income.
- Compute C and D on each past year's book profit, with and without its share of the past income.
- Take zero for any component where no tax was payable.
- Floor the result at zero if negative.
- Reduce the section 206(1)(m) credit by the amount claimed.
- File Form No. 53 as a signed printout uploaded in the specified manner, verified under section 265.
- Model the credit reduction before claiming.
Common mistakes
- Computing only (A − B) and ignoring the historic charge.
- Allocating the past income to a single year where it spans several.
- Treating a negative result as a further reduction.
- Leaving the section 206(1)(m) credit unadjusted.
- Filing an unsigned Form No. 53 or one verified by an unauthorised person.