Sections 54 and 55 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 54 gives special deductions to an assessee carrying on a "specified oil exploration business" under an agreement with the Central Government, and a formula for the transfer of that business or an interest in it. Section 55 sends the computation of insurance business profits to Schedule XIV. This article explains both as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
Section 54: where the assessee has a specified oil exploration business (prospecting for, extraction or production of mineral oils, under an agreement with the Central Government laid before Parliament), the deductions in sub-sections (3) and (4) apply: infructuous exploration on surrendered areas, drilling and exploration costs, and depletion, computed as the agreement specifies. A transfer of the business or an interest is governed by the A, B, C formula in sub-section (5). Section 55: profits of an insurance business, including that of a mutual insurance company or co-operative society, are computed as per Schedule XIV, irrespective of contrary provisions.
Where these sections sit
Both sections are in Part D of Chapter IV. They follow section 53, in the article on sections 53, 56 and 57. The deduction for the Site Restoration Fund for petroleum and gas businesses is a separate matter under section 49, in the article on sections 47 to 50. For the Schedule that section 55 uses, see our post on Schedule XIV. If your business is in oil and gas or insurance, our tax planning advisory team can help.
Section 54: business of prospecting for mineral oils
Section 54(1) and (2): the business
Where the assessee undertakes a specified oil exploration business, the deductions in sub-sections (3) and (4) are allowed while computing income under the head "Profits and gains of business or profession". "Specified oil exploration business" means a business consisting of prospecting for, or extraction or production of, mineral oils where all these conditions are fulfilled:
- (a) the Central Government has entered into an agreement with the assessee;
- (b) the agreement is for association or participation of the Central Government or any person authorised by it; and
- (c) the agreement is laid before each House of Parliament.
Section 54(3): the deductions
| Clause | Period | Deduction |
|---|---|---|
| (a) | Before the beginning of commercial production | Expenditure towards infructuous or abortive exploration in respect of any surrendered area |
| (b) | After the commencement of commercial production | Expenditure (whether before or after such production) in respect of drilling or exploration activities or services, or physical assets used in that connection |
| (c) | The tax year of commencement of commercial production and such succeeding tax years as specified in the agreement | Amount towards depletion of mineral oil in the mining area |
Section 54(4): in lieu of or in addition
The deductions are:
- (a) either in lieu of, or in addition to, any allowance admissible under the Act, as specified in the agreement; and
- (b) computed and made in the manner specified in the agreement, and the other provisions of the Act are deemed to have been modified to that extent.
So the Act leaves the amounts and the method to the agreement. The text of section 54 prints no rate, no limit and no percentage for any of the three deductions.
Section 54(5): transfer of the business or an interest in it
Where the business, or any interest in it, is wholly or partly transferred as per the agreement, the profit is charged or the deduction allowed as follows, where:
- A = proceeds of the transfer (so far as they consist of capital sums);
- B = total amount of expenditure incurred in connection with the business or to obtain an interest in it;
- C = amount of expenditure incurred remaining unallowed.
| Case | Result |
|---|---|
| (a) A is less than C | (C minus A) is allowed as a deduction in the tax year of transfer |
| (b)(i) A is greater than C but less than B | (A minus C) is the profit chargeable under "Profits and gains of business or profession" for the tax year of transfer |
| (b)(ii) Any other case under (b) (A greater than C and not less than B) | Only (B minus C) is the profit chargeable under that head for the tax year of transfer |
| (b)(iii) In every case under (b) | No deduction for the expenditure remaining unallowed in the tax year of transfer or any later tax year |
The text does not say what happens if A is exactly equal to C; clause (a) covers A less than C and clause (b) covers A greater than C, and neither speaks of equality.
Worked example: a transfer of an interest
Deccan Petro Ltd (an invented company) has spent Rs. 20,00,00,000 in all (B) on its oil exploration business. Of this, Rs. 8,00,00,000 remains unallowed (C). It transfers an interest, as the agreement permits.
- Proceeds Rs. 3,00,00,000 (A). A is less than C, so under (a) a deduction of C minus A = 8,00,00,000 minus 3,00,00,000 = Rs. 5,00,00,000 is allowed in the year of transfer.
- Proceeds Rs. 12,00,00,000 (A). A is greater than C and less than B, so under (b)(i) the profit chargeable is A minus C = 12,00,00,000 minus 8,00,00,000 = Rs. 4,00,00,000. Under (b)(iii), no deduction is allowed for the unallowed expenditure from that year on.
- Proceeds Rs. 25,00,00,000 (A). A is greater than B, so under (b)(ii) only B minus C = 20,00,00,000 minus 8,00,00,000 = Rs. 12,00,00,000 is chargeable.
Section 54(6) and (7): no business now, and mergers
- (6) If the business or interest is no longer in existence in the year of transfer, sub-section (5) applies as if the business were in existence during that year.
- (7) Where the business or interest is sold or transferred in a scheme of amalgamation or demerger and the amalgamated or resulting entity is an Indian company, sub-section (5) (a) does not apply to the amalgamating or demerged company, and (b) continues to apply to the amalgamated or resulting company as it would have applied to the transferor, as if the transfer had not taken place.
Section 55: insurance business
Section 55 reads: irrespective of anything to the contrary in the provisions of the Act for computing income under the head "Income from house property", "Capital gains" or "Income from other sources", or in section 390(5) and (6), or in sections 26 to 54, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed as per the provisions of Schedule XIV.
Points to note:
- The section is a pointer. It prints no formula; the computation is in Schedule XIV, which is covered by a live post on Schedule XIV.
- It overrides the ordinary heads of income and sections 26 to 54, so an insurer does not compute its profits under those sections.
- It covers both mutual insurance companies and co-operative societies carrying on an insurance business.
- The definition of "income" in section 2(49)(l) also refers to the profits of insurance business computed as per section 55 or any surplus taken as such profits as per Schedule XIV; see the article on clauses 49 to 76 of section 2.
Need help with oil and gas or insurance computations?
An agreement-based deduction depends on the exact terms of the agreement, and an insurer's profits follow a separate Schedule. To review the position for your business, see our tax planning advisory service.
Key takeaways
- A specified oil exploration business needs an agreement with the Central Government, for association or participation, laid before each House of Parliament.
- Three deductions apply: infructuous exploration on surrendered areas, drilling and exploration costs, and depletion, computed as the agreement specifies.
- A transfer of the business or an interest follows the A, B, C formula, with no deduction for unallowed expenditure after a profit case.
- The text is silent where A equals C.
- Section 55 sends all insurance business profits to Schedule XIV, overriding sections 26 to 54.
- Agreements and Schedule XIV details are outside the section text.
Read next
- Sections 53, 56 and 57: stamp duty value, interest of financial institutions and contract revenue
- Sections 47 to 50: agricultural extension, development accounts, Site Restoration Fund and trade associations
- Section 51 and Schedule XII: prospecting for minerals
- Schedule XIV: insurance business
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.