Amortisation of Preliminary Expenses (Section 44): Deduction, 5% Cap and Form 5 under the Income Tax Act 2025
Under section 44 of the Income-tax Act, 2025, certain preliminary expenses (project report, market survey, legal charges, company registration and similar costs) are not deducted in one go. They are deducted at one-fifth a year for five successive tax years, and the total expenditure that qualifies is capped at 5% of the cost of the project (or, for a company that opts for it, 5% of capital employed). It applies to Indian companies and to resident persons other than companies.
This guide covers which expenses qualify, when the five years start, how the cap works, and the forms involved. Every point is taken from section 44 and rules 27 and 28 of the Income-tax Rules, 2026, as amended by the Finance Act, 2026, and the section or rule number is given next to it. Last reviewed against that text on 10 November 2026.
What is amortisation of preliminary expenses under the Income Tax Act 2025?
"Amortisation" here means spreading a cost over several years instead of claiming it in the year it was incurred. Section 44(1) allows a deduction equal to one-fifth of the qualifying expenditure for each of five successive tax years. The deduction is available when the expenditure is incurred:
- before the business commences (section 44(1)(a)); or
- after commencement, for extending the undertaking or setting up a new unit (section 44(1)(b)).
Who can claim the deduction?
An Indian company, or a person other than a company who is resident in India (section 44(1)). So an individual, a firm or an LLP that is resident in India can claim, but a non-resident non-company cannot.
Which expenses qualify?
Section 44(2) lists them. Items (a) and (b) apply to every eligible assessee. Item (c) applies only to a company.
| Expenditure | Who can claim | Reference |
|---|---|---|
| Feasibility report; project report; market survey or any other survey necessary for the business; engineering services relating to the business | Company and non-company | Section 44(2)(a) |
| Legal charges for drafting any agreement between the assessee and another person relating to setting up or conducting the business | Company and non-company | Section 44(2)(b) |
| Legal charges for drafting and printing the Memorandum and Articles of Association; Companies Act, 2013 registration fees; underwriting commission, brokerage and drafting, typing, printing and advertisement charges for a public issue of shares or debentures | Company only | Section 44(2)(c) |
| Other items that may be prescribed, if they are not eligible for a deduction under any other provision | Company and non-company | Section 44(2)(d) |
I did not find any prescribed items in the rules I checked (rules 27 and 28 deal only with the statement and the audit report), so treat clause (d) as open until you see a notified list.
When do the five years start?
The first of the five tax years is:
- for pre-commencement expenses, the tax year in which the business commences (section 44(1)(i)); and
- for extension or a new unit, the tax year in which the extension is completed or the new unit starts production or operation (section 44(1)(ii)).
The clock does not start when you pay the bill. A company that pays for a project report in tax year 2025-26 but starts business in 2026-27 starts claiming in 2026-27.
What is the 5% cap on preliminary expenses?
Section 44(4) says the deduction for the aggregate of the section 44(2) expenditure is restricted to 5% of either:
- the cost of the project; or
- the capital employed in the business of the company, where the assessee is an Indian company, at its option.
Only a company has the second choice. A non-company is limited to cost of the project.
How is the cost of the project defined?
Section 44(5)(a): the actual cost of fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on developing land and buildings). It is taken as shown in the books on the last day of the tax year in which the business commences. For an extension or new unit, it is the cost on the last day of the year the extension is completed or the unit starts, and only for assets acquired or developed for that extension or unit.
How is capital employed defined?
Section 44(5)(b): the aggregate of issued share capital, debentures and long-term borrowings on the last day of the commencement year. For an extension or new unit, only the capital, debentures and borrowings raised for that extension or unit count.
"Long-term borrowings" (section 44(5)(c)) means money borrowed from the Government, from Industrial Finance Corporation of India Limited or another financial institution eligible under section 32(e), or from a banking institution. It also covers money borrowed or debt incurred abroad to buy capital plant and machinery outside India, where the tenure is at least seven years.
Worked example 1: a company with a capital employed option (tax year 2026-27)
Assumptions. Meena Foods Private Limited, an Indian company, incurs Rs 9,00,000 of qualifying expenses (project report, survey, MoA and AoA drafting, registration fees) before it starts manufacturing. The business commences in tax year 2026-27. On 31 March 2027 the books show fixed assets (land, building, plant) at Rs 1,00,00,000, and issued share capital plus long-term borrowings of Rs 1,40,00,000.
| Step | Working | Result |
|---|---|---|
| 1. Cap on cost of project | 5% of Rs 1,00,00,000 | Rs 5,00,000 |
| 2. Cap on capital employed | 5% of Rs 1,40,00,000 | Rs 7,00,000 |
| 3. Option chosen: capital employed | Lower of Rs 9,00,000 spent and Rs 7,00,000 cap | Rs 7,00,000 |
| 4. Yearly deduction | Rs 7,00,000 / 5 | Rs 1,40,000 a year |
| 5. Years | 2026-27 to 2030-31 | 5 x Rs 1,40,000 = Rs 7,00,000 |
Had the company stayed with cost of project, the qualifying amount would be Rs 5,00,000 and the yearly deduction Rs 1,00,000. The remaining Rs 2,00,000 is outside the section 44 deduction in either case. Section 44 does not say how that excess is treated, so check this with the company's CA before booking it.
Worked example 2: a resident individual who is not a company (tax year 2026-27)
Assumptions. Ravi, a resident individual, sets up a small manufacturing business. Before it starts in 2026-27 he pays Rs 1,00,000 for a feasibility report, Rs 80,000 for a market survey, Rs 70,000 for drafting a supplier agreement and Rs 50,000 for engineering services. On 31 March 2027 his fixed assets are Rs 80,00,000 in the books.
| Step | Working | Result |
|---|---|---|
| 1. Total qualifying expenditure | 1,00,000 + 80,000 + 70,000 + 50,000 | Rs 3,00,000 |
| 2. Cap: 5% of cost of project | 5% of Rs 80,00,000 | Rs 4,00,000 |
| 3. Qualifying amount | Lower of Rs 3,00,000 and Rs 4,00,000 | Rs 3,00,000 |
| 4. Yearly deduction | Rs 3,00,000 / 5 | Rs 60,000 a year for 2026-27 to 2030-31 |
Because Ravi is not a company or a co-operative society, he also needs an audit and an audit report. See the next section.
What extra conditions apply if the assessee is not a company?
Section 44(6): a person other than a company or co-operative society gets no deduction unless:
- the accounts for the year(s) in which the expenditure was incurred are audited by an accountant before the specified date in section 63; and
- for the first year of claim, the audit report is furnished by that date, in the prescribed form, signed and verified by the accountant.
Under section 63(5)(a), the specified date is one month before the due date for filing the return under section 263(1). The audit report is in Form No. 6 (rule 28).
What statement must be filed, and when?
Section 44(3) requires a statement of particulars for the expenditure under section 44(2)(a), meaning the reports, surveys and engineering services. Rule 27 says it is in Form No. 5, for each tax year, furnished to the Director General of Income-tax (Systems) or a person he authorises, one month before the return due date under section 263(1).
| Requirement | Applies to | Form / date | Reference |
|---|---|---|---|
| Statement of particulars of section 44(2)(a) expenditure | All claimants | Form 5, each tax year, one month before the return due date | Section 44(3); rule 27 |
| Audit of accounts and audit report | Non-company, non-co-operative society | Form 6, by the specified date (one month before the return due date) | Section 44(6); rule 28; section 63(5) |
What happens on an amalgamation or demerger?
- Amalgamation (section 44(7)): if the undertaking is transferred to another Indian company before the five years end, the amalgamating company gets no deduction for the year of amalgamation. Section 44 then applies to the amalgamated company as if the amalgamation had not happened.
- Demerger (section 44(8)): the same rule, with the demerged company losing the deduction for that year and the resulting company continuing the claim.
Can the same expense be claimed twice?
No. Under section 44(9), once a deduction under this section is claimed and allowed for an expenditure, no deduction is allowed for it under any other provision, for that year or any other year.
Two real-life situations
Situation 1. Sunita pays Rs 2,00,000 for a project report in January 2027, but her new company only begins operations in tax year 2027-28. Her five-year clock starts in 2027-28, not the year she paid the consultant (section 44(1)(i)).
Situation 2. Arun, a resident individual, spends Rs 1,50,000 on a market survey for a new unit of his existing business. The unit starts production in tax year 2026-27. This falls under section 44(1)(b), so the five years start from 2026-27. The cap is 5% of the cost of fixed assets acquired for that unit only (section 44(5)(a)(ii)), not of his whole business.
Common mistakes
- Claiming the full amount in year one. The deduction is one-fifth a year, not the whole expense when it is paid.
- Starting the clock at payment. It starts with the commencement year, or the year the extension or new unit starts.
- Ignoring the 5% cap. The aggregate expenditure that qualifies is capped before the one-fifth is calculated.
- A non-company claiming company-only items. MoA and AoA drafting, registration fees and public-issue costs under section 44(2)(c) are for companies.
- Skipping the audit and Form 6. For a non-company, no audit report means no deduction.
- Missing Form 5. It is due one month before the return due date, not with the return.
Where this is in the Act
- Section 44(1): eligibility, one-fifth for five years, start year
- Section 44(2): list of qualifying expenditure
- Section 44(3), rule 27: Form 5 statement
- Section 44(4), (5): 5% cap, cost of project, capital employed, long-term borrowings
- Section 44(6), rule 28, section 63(5): audit and Form 6 for non-companies
- Section 44(7), (8): amalgamation and demerger
- Section 44(9): no double deduction
How do CA firms keep track of a five-year claim?
A section 44 claim runs for five tax years and carries a Form 5 date each year, plus Form 6 for non-company clients. Finexo's practice management software lets a CA firm track such recurring client deadlines and tasks in one place. It does not compute the deduction or file the forms for you.
This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.
Frequently Asked Questions
How are preliminary expenses deducted under the Income-tax Act, 2025?
Under section 44(1), one-fifth of the qualifying expenditure is deducted in each of five successive tax years. The first year is the year the business commences, or the year the extension or new unit starts.
What is the 5% limit on preliminary expenses?
Section 44(4) restricts the aggregate qualifying expenditure to 5% of the cost of the project. An Indian company may instead choose 5% of capital employed.
Can a non-company claim preliminary expenses?
Yes, a resident person other than a company can claim, but only for the items in section 44(2)(a) and (b), and only if the accounts are audited and the Form 6 audit report is furnished by the specified date (section 44(6), rule 28).
What is Form 5 under section 44?
Form 5 is the statement of particulars of the section 44(2)(a) expenditure. Under rule 27 it is furnished for each tax year, one month before the return due date under section 263(1).
Are company registration fees deductible as preliminary expenses?
Yes, for a company. Section 44(2)(c) covers Companies Act, 2013 registration fees and the legal charges for drafting and printing the Memorandum and Articles of Association.
What happens to the section 44 deduction if the company amalgamates or demerges?
The amalgamating or demerged company gets no deduction for the tax year of the transfer. The amalgamated or resulting company continues the claim as if the transfer had not happened (section 44(7) and (8)).
Can I claim the same preliminary expense under another provision as well?
No. Once a deduction is claimed and allowed under section 44 for an expenditure, no deduction is allowed for it under any other provision, in that year or any other (section 44(9)).