Section 35-D of Income Tax Act

Author : Ebiz Filing | Published On : 10 Nov 2023

Introduction

Taxes can be quite complex, and they're a big part of how our government operates and provides services. In India, there's a law called the Income Tax Act that helps regulate how taxes work. One important but often misunderstood part of this law is Section 35-D. In this blog, we'll break down Section 35-D in simple terms, so you can understand why it matters and how it can benefit you.

What is Section 35-D?

Section 35-D is a special rule in the Income Tax Act. It's all about making life easier for people who are starting a new business. This rule helps you deal with the initial costs of starting a business by letting you spread those costs over a few years. These costs might include things like fees for lawyers and professionals, paperwork fees, and money spent on figuring out if your business idea will work.

Why Does Section 35-D Matter?

Section 35-D is there to support new businesses and help them get off the ground. Here's why it's important:

Less Tax to Pay: This rule can lower the amount of tax you have to pay because it lets you divide up your business startup costs over time. This makes it easier on your wallet in the beginning.
Startup Help: If you're thinking about starting a new business, Section 35-D can give you a financial boost. You won't have to pay all your business setup costs at once.
Attracting Investors: When you want people to invest in your business, showing them that you're managing your money smartly is a big plus. Section 35-D helps you do just that.
Less Red Tape: Managing your taxes can be complicated, but this rule simplifies things. You won't have to worry about a lot of complicated accounting.

How Does Section 35-D Work?

Okay, so how does it all work? Let's break it down:

Tax Break Over Time: Section 35-D lets you deduct a part of your initial expenses over five years. You start claiming these deductions from the year your business begins.
What Expenses Count: The expenses you can split up include things like lawyer and professional fees, paperwork costs, and money spent on figuring out if your business will work.
Five-Year Plan: Each year, you get to deduct one-fifth (1/5) of your total initial expenses. This continues for five years.
Business Stops: If your business stops before five years, you can claim any remaining expenses in the year you close it.
Limits Apply: You can't claim more than the total amount of your initial expenses. And not all types of businesses qualify for this rule.

Let's look at a simple example to understand how Section 35-D works

Imagine you're starting a small software company, XYZ Tech. You spend Rs. 1,00,000 on lawyer and professional fees, Rs. 25,000 on paperwork, and Rs. 50,000 on figuring out if your software idea will work. That's a total of Rs. 1,75,000 in initial expenses.

You strike off your business in the year 2022-23. So, you can use Section 35-D to split your deductions over five years like this:

Year 2022-23: You can claim Rs. 35,000 (1/5th of Rs. 1,75,000)

Year 2023-24: Rs. 35,000

Year 2024-25: Rs. 35,000

Year 2025-26: Rs. 35,000

Year 2026-27: Rs. 35,000

Conclusion

In simple terms, Section 35-D of the Income Tax Act helps you start and grow your business without overwhelming you with immediate tax bills. It's like a helping hand for entrepreneurs, especially if you're just getting started. By spreading your startup expenses over five years, you can plan your finances better and make your business more appealing to investors. So, if you're thinking about starting a business in India, understanding Section 35-D can be a valuable tool for your financial success.