Eligibility of R&D Expenses

• Research and Development (R&D) expenses are deductible under the Income-tax Act, 1961.
  
• Deduction is available to companies engaged in scientific research related to their business.
  
• Both revenue and capital expenditures on R&D may be eligible for deduction.
  
• The expense must be incurred wholly and exclusively for business purposes.
  
• R&D must be conducted either in-house or through approved institutions.
  

Revenue vs. Capital Expenditure

• Revenue expenditure on scientific research is fully deductible under section 35(1)(i).
  
• Capital expenditure (excluding land) is deductible under section 35(1)(iv).
  
• The deduction is allowed in the year in which the expenditure is incurred.
  
• Salaries, consumables, and utility expenses related to R&D are treated as revenue expenses.
  
• Buildings and equipment used for R&D qualify as capital expenditures.
  

Weighted Deduction (Now Phased Out)

• Section 35(2AB) earlier provided for weighted deduction for in-house R&D.
  
• Weighted deduction of 150 percent was available for companies approved by prescribed authority.
  
• From assessment year 2021–22 onwards, weighted deduction has been reduced to 100 percent.
  
• The deduction is now limited to actual expenditure incurred.
  
• The in-house R&D facility must be recognized by the competent authority.
  

Payments to Outside Agencies

• Payments made to approved research associations or universities are deductible under section 35(1)(ii) or 35(1)(iii).
  
• A deduction of 100 percent is allowed for contributions to such approved entities.
  
• The institution must be approved by the Income Tax Department.
  
• Proof of payment and approval status must be retained for verification.
  
• These deductions are available even if the research is not directly related to the business.
  

Documentation and Compliance

• Companies must maintain detailed records of R&D projects and costs.
  
• Approvals and recognitions must be obtained from competent authorities for certain deductions.
  
• Expenses must be certified by auditors during tax audit or statutory audit.
  
• The details should be disclosed in the income tax return and audit report.
  
• Inaccurate or unsupported claims may lead to disallowance and penalties.