Section 44 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.
Section 44 allows a resident assessee to spread certain start-up expenses over five years instead of deducting them in one go. It lists the eligible expenses, caps the total at 5 per cent of the project cost or the capital employed, and attaches an audit condition for non-corporate assessees. This article explains the nine sub-sections as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026. It is the section that start-ups and new units look to when planning how to treat their set-up costs, and our tax planning advisory team works through it with them.
An Indian company, or a resident person other than a company, that incurs listed expenditure before the commencement of business, or after commencement for an extension or a new unit, gets a deduction of one-fifth of the expenditure for each of five successive tax years. The total eligible expenditure is capped at 5 per cent of the cost of the project or, for an Indian company at its option, of the capital employed. A non-corporate assessee needs an audit by an accountant. A deduction under this section cannot be claimed again under any other provision.
Section 44(1): who, when and how much
If an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs expenditure specified in sub-section (2):
- (a) before the commencement of its business; or
- (b) after the commencement of its business, in connection with the extension of its undertaking or in connection with setting up a new unit,
the assessee is allowed a deduction of one-fifth of the expenditure for each of the five successive tax years beginning with:
| Case | The five tax years begin with |
|---|---|
| Clause (a): before commencement | The tax year in which the business commences |
| Clause (b): extension or new unit | The tax year in which the extension of the undertaking is completed or the new unit commences production or operation |
Section 44(2): the expenditure covered
| Clause | Expenditure |
|---|---|
| (a) | Expenditure in connection with (i) preparation of a feasibility report, (ii) preparation of a project report, (iii) conducting a market survey or any other survey necessary for the business, (iv) engineering services relating to the business |
| (b) | Legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business |
| (c) | If the assessee is a company, in addition: (i) legal charges for drafting and printing of the Memorandum and Articles of Association; (ii) fees for registering the company under the Companies Act, 2013; (iii) expenditure in connection with the issue, for public subscription, of shares or debentures, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus |
| (d) | Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed |
The Companies Act, 2013 is another law; check it. Clause (d) is left to the rules; the Act itself lists no further item.
Section 44(3): a statement of particulars
For the expenditure in sub-section (2)(a) (the reports, surveys and engineering services), the assessee shall furnish a statement of particulars in such form and manner as may be prescribed. The detail is left to the Income-tax Rules, 2026.
Section 44(4): the 5 per cent cap
The allowable deduction in respect of the aggregate expenditure in sub-section (2) is restricted to 5 per cent:
- (a) of the cost of the project; or
- (b) of the capital employed in the business of the company, where the assessee is an Indian company, at its option.
Section 44(5): the definitions behind the cap
Cost of the project means the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), and:
- for a case under sub-section (1)(a), the actual cost as shown in the books on the last day of the tax year in which the business commences;
- for a case under sub-section (1)(b), the actual cost as shown in the books on the last day of the tax year in which the extension is completed or the new unit commences production or operations, so far as the assets were acquired or developed in connection with the extension or the new unit.
Capital employed in the business of the company means the aggregate of the issued share capital, debentures and long-term borrowings as on the same last day (for clause (a), the last day of the tax year in which the business of the company commences; for clause (b), the last day of the tax year of completion or commencement of production or operation, so far as raised or obtained in connection with the extension or new unit).
Long-term borrowings means (i) moneys borrowed by the company from the Government, Industrial Finance Corporation of India Limited, or any other financial institution eligible for deduction under section 32(e), or any banking institution (not being a financial institution referred to above); or (ii) moneys borrowed or debt incurred in a foreign country for the purchase outside India of capital plant and machinery, where the tenure is not less than seven years.
Section 44(6): audit condition for non-companies
If the assessee is a person other than a company or a co-operative society, no deduction is admissible unless:
- (a) the accounts for the year or years in which the expenditure is incurred have been audited by an accountant before the specified date referred to in section 63; and
- (b) the assessee furnishes, for the first year in which the deduction under section 44 is claimed, the report of such audit by such date, in such form, signed and verified by that accountant and setting out such particulars as may be prescribed.
"Accountant" is defined in section 2(1) by reference to section 515(3)(b). For the tax audit date, see our post on Section 63.
Section 44(7) and (8): amalgamation and demerger within the five years
- Amalgamation (7): if an undertaking of an Indian company entitled to the deduction is transferred before the five years end, in a scheme of amalgamation, to another Indian company, (a) no deduction is allowed to the amalgamating company for the tax year of amalgamation, and (b) all provisions of section 44 continue to apply to the amalgamated company as if the amalgamation had not taken place.
- Demerger (8): if an undertaking is transferred before the five years end, in a scheme of demerger, to another company, (a) no deduction is allowed to the demerged company for the tax year of demerger, and (b) the provisions continue to apply to the resulting company as if the demerger had not taken place.
Section 44(9): no double deduction
If a deduction under section 44 is claimed and allowed for any tax year for any expenditure in sub-section (2), no deduction is allowed for that expenditure under any other provision of the Act, for the same or any other tax year.
Worked example: a new company
Greenleaf Packaging Pvt Ltd (an invented Indian company) commences business in the tax year commencing on 1 April 2026. It has spent Rs. 14,00,000 on its project report, market survey, incorporation and legal charges before commencement. The actual cost of its fixed assets in the books on the last day of that tax year (cost of the project) is Rs. 2,00,00,000.
- Cap: 5 per cent of Rs. 2,00,00,000 = Rs. 10,00,000. The expenditure of Rs. 14,00,000 exceeds the cap, so the aggregate eligible for the deduction is restricted to Rs. 10,00,000 (if the company had opted for capital employed instead, it would take 5 per cent of that figure).
- Yearly deduction: one-fifth of Rs. 10,00,000 = Rs. 2,00,000 for each of the five successive tax years beginning with the tax year in which the business commences (the tax years commencing on 1 April 2026 to 1 April 2030).
- Excess: the Act prints no deduction for the Rs. 4,00,000 above the cap under section 44; whether another provision applies is not stated here.
A sole proprietor in the same position would also need the audit report required by section 44(6).
Need help with start-up expenses?
How a start-up spreads project costs over five years, and whether the cap bites, depends on the cost of the project or the capital employed. To plan the incorporation and project spend, see our tax planning advisory service.
Key takeaways
- One-fifth of eligible expenditure is deducted in each of five successive tax years.
- The five years run from the year the business commences, or from the completion of the extension or the new unit's commencement.
- The aggregate is capped at 5 per cent of the cost of the project or, for an Indian company at its option, of the capital employed.
- Non-corporate assessees need an audit of accounts and an audit report.
- On amalgamation or demerger within the five years, the deduction passes to the amalgamated or resulting company.
- A deduction under section 44 cannot be claimed again elsewhere.
Read next
- Sections 40, 42 and 43: cost of acquisition and foreign exchange fluctuation
- Section 45: scientific research expenditure and Schedule XIII
- Section 63: tax audit
- Section 26: business income
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.