100% Deduction for Capital Expenditure of Specified Business: Section 46, Income Tax Act 2025

Section 46 of the Income-tax Act, 2025 lets an assessee, at his option, deduct the whole of the capital expenditure incurred wholly and exclusively for a "specified business" in the tax year in which it is incurred. The specified businesses include cold chains, warehouses, new hotels of two star or above, hospitals with at least 100 beds, fertilizer plants, and new infrastructure facilities. Expenditure on land, goodwill and financial instruments never qualifies, and the assets must stay in the business for eight years.

This guide covers which businesses qualify, the conditions, how the amount is computed, what happens if an asset is diverted, and the audit report and forms. All figures are from section 46 (as amended by the Finance Act, 2026) and rules 36 and 66 of the Income-tax Rules, 2026. Last reviewed against that text on 10 November 2026.

What is the capital expenditure deduction under section 46?

Capital expenditure is normally not deductible in one go. Under section 33 you claim depreciation on the asset over its life. Section 46(1) is a special route for a short list of businesses: the entire capital expenditure is allowed as a deduction in the tax year in which it is incurred, provided it is incurred wholly and exclusively for the specified business.

The claim is optional ("at his option"). Once it is claimed and allowed, that expenditure cannot be claimed again under any other section, in any tax year, or under section 46 in another year (section 46(5)). Section 26(2)(k) of the Act itself refers to section 35AD of the 1961 Act alongside section 46, which suggests the lineage, but check the old-law mapping yourself before relying on it.

Which businesses are "specified businesses"?

The list is in section 46(11)(d). The Table in section 46(6) adds a date: the business must commence operations on or after the date in column C.

Sl. No.	Specified business	Operations must start on or after
1	Cross-country natural gas pipeline network for distribution, including storage that is an integral part	1 April 2007
2	Building and operating a new hotel of two star or above category	1 April 2010
3	Building and operating a new hospital with at least 100 beds	1 April 2010
4	Housing project under a slum redevelopment or rehabilitation scheme, notified by the Board	1 April 2010
5	Housing project under an affordable housing scheme, notified by the Board	1 April 2011
6	New plant or newly installed capacity in an existing plant for fertilizer	1 April 2011
7	Inland container depot or container freight station notified or approved under the Customs Act, 1962	1 April 2012
8	Bee-keeping and production of honey and beeswax	1 April 2012
9	Warehousing facility for storage of sugar	1 April 2012
10	Slurry pipeline for transporting iron ore	1 April 2014
11	Semi-conductor wafer fabrication manufacturing unit, notified by the Board	1 April 2014
12	Developing, or operating and maintaining, any infrastructure facility	1 April 2017
13	All other cases (for example cold chain facility, warehousing for agricultural produce)	1 April 2009

"Infrastructure facility" in section 46(11)(c) means a road including toll road, bridge or rail system; a highway project including housing or other activities integral to it; a water supply, water treatment, irrigation, sanitation, sewerage or solid waste management system; and a port, airport, inland waterway, inland port or navigational channel in the sea. A "cold chain facility" is a chain of storage or transport facilities for farm, forest, meat, poultry, marine, dairy and processed food products under scientifically controlled conditions (section 46(11)(b)).

What conditions must the business meet?

Section 46(3) applies the section only to a specified business that meets all of these:

• It is not set up by splitting up or reconstructing an existing business (3)(a).
• It is not set up by transferring previously used machinery or plant to it (3)(b). Exceptions are in the next section.
• A gas, crude or petroleum oil pipeline business must be owned by an Indian-registered company (or consortium of such companies) or a statutory authority, board or corporation. It must be approved by the Petroleum and Natural Gas Regulatory Board and notified by the Central Government, and must make the prescribed share of pipeline capacity available on a common carrier basis to others (3)(c).
• An infrastructure facility business must be owned by a company registered in India, a consortium of such companies, or a statutory authority or body, and must have an agreement with the Central or State Government, a local authority or a statutory body to develop, or operate and maintain, a new facility (3)(d).

Can I use second-hand machinery?

Section 46(11)(e) and (f) give two ways. Machinery used outside India by someone else is not treated as "previously used" if it was never used in India before installation, is imported, and no depreciation has been or can be allowed on it to anyone. Separately, if previously used machinery or plant transferred to the business is worth no more than 20% of the total value of machinery and plant used in the business, condition (3)(b) is deemed complied with.

What counts as capital expenditure, and what does not?

Section 46(11)(g) removes two kinds of spend from "expenditure of capital nature":

• Any payment (or total payments to one person in a day) above Rs 10,000 that is not made through a specified banking or online mode (the same cash test appears in the disallowance checklist).
• Expenditure on acquiring land, goodwill or a financial instrument.

Spend incurred before operations begin is allowed in the year the business commences, provided it is capitalised in the books on the date of commencement (section 46(2)).

How is the deduction calculated? Two worked examples

Example 1: a new hotel in tax year 2026-27

Assumptions: a company builds and operates a new two-star-or-above hotel that began operations in tax year 2026-27 (after 1 April 2010, so row 2 applies). It meets every condition in section 46(3). Capital spend in the year, paid by bank transfer unless stated:

Item	Amount (Rs)	Allowed?
Land purchase	1,20,00,000	No, land excluded (46(11)(g)(ii))
Building construction	3,80,00,000	Yes
Plant and machinery	70,00,000	Yes
Furniture	25,00,000	Yes
Fittings paid in cash to one vendor on one day	18,000	No, above Rs 10,000 and not by banking mode (46(11)(g)(i))
Deduction under section 46(1)	4,75,00,000	3,80,00,000 + 70,00,000 + 25,00,000

If the company also claims this deduction, section 46(5) bars any other deduction for the same Rs 4,75,00,000 in any year, and section 46(4) bars deductions under Chapter VIII-C for this business.

Example 2: a hospital that spends before it opens

Assumptions: a company builds a new 120-bed hospital. In tax year 2026-27 it spends Rs 2,00,00,000 on construction and equipment (land excluded) and capitalises it in its books. Operations begin in tax year 2027-28, when it spends another Rs 1,50,00,000 on equipment.

1. Pre-commencement spend of Rs 2,00,00,000 is not claimed in 2026-27. Under section 46(2) it is allowed in the year the business commences, 2027-28.
2. Add the 2027-28 spend: Rs 2,00,00,000 + Rs 1,50,00,000 = Rs 3,50,00,000.
3. The deduction available in 2027-28 is Rs 3,50,00,000 if the company opts for it.

What if an asset is used for something else later?

An asset on which the deduction was allowed must be used only for the specified business for eight years, starting with the tax year in which it was acquired or constructed (section 46(9)(a)).

If the asset is used for another purpose within that period, and the sum is not chargeable under section 26(2)(k) (which covers the sum received when an asset other than land, goodwill or a financial instrument is demolished, destroyed, discarded or transferred and the whole cost was allowed under section 46), then section 46(9)(b) applies. The total deduction allowed, reduced by the depreciation allowable under section 33 as if no section 46 deduction had been given, is deemed business income of the year of misuse. A company that became a sick industrial company is exempt from this clawback (section 46(10)).

Example 3: clawback on a fertilizer plant

Assumptions: Meena's company claimed Rs 2,00,00,000 on new fertilizer plant in tax year 2026-27. In 2029-30 it moves the plant to a different business. Suppose depreciation that section 33 would have allowed on the plant up to that year, had no section 46 deduction been taken, is Rs 62,00,000. (This is an assumed figure. The prescribed depreciation rate is not in section 46, so a real case must compute it.)

Step	Rs
Deduction allowed under section 46	2,00,00,000
Less: notional depreciation under section 33	62,00,000
Deemed business income of 2029-30	1,38,00,000

Real-life scenarios

Ravi's split-up. Ravi runs a hotel and carves out one floor into a new hotel entity, moving the fixtures across. Both section 46(3)(a) and (3)(b) are at risk: the new business is built by splitting an existing business and with previously used assets. He should expect the claim to fail.

Meena's second-hand machines. Meena sets up a fertilizer unit with machinery worth Rs 50,00,000 in total. She moves in used machines worth Rs 8,00,000 from another unit. That is 16% (8,00,000 / 50,00,000), within the 20% limit in section 46(11)(f), so condition (3)(b) is deemed met. If the used machines were worth Rs 12,00,000 (24%), the limit would be crossed and the exception would not help.

Arjun's hotel lease-out. Arjun builds a qualifying hotel and later hands day-to-day operation to another party, keeping ownership. Section 46(7) deems him to carry on the hotel business referred to in section 46(11)(d)(iv), so the position does not change just because he stopped operating it.

What are the special notification rules for housing and semiconductor units?

Under rule 36, an affordable housing project (section 46(11)(d)(vii)) applies in Form No. 18, and a semiconductor wafer fabrication unit (section 46(11)(d)(xiii)) in Form No. 19, to the Member (IT), Central Board of Direct Taxes. If the Board sends a deficiency letter, it must be cured within one month from the end of the month of service, or the application may be treated as invalid (rule 36(2)). The applicant must keep separate books with full details of the capital expenditure and file returns by the due date (rule 36(3)).

An affordable housing project must, among other conditions in rule 36(5): have prior sanction under the Scheme of Affordable Housing in Partnership, be on a plot of at least one acre, have affordable units forming at least 30% EWS, 60% EWS and LIG together, and 90% EWS, LIG and MIG together, and be completed within five years from the end of the tax year of sanction. A semiconductor unit must be exclusively for wafer fabrication, have prior approval under the Modified Special Incentive Package Scheme, and begin commercial production on or after 1 April 2014 (rule 36(6)).

What audit report is needed to claim section 46?

Under rule 66, the accounts of the eligible business for the year of claim must be audited by an accountant (as defined in section 515(3)(b)) and the report furnished before the specified date in section 63, in Form No. 32. Each undertaking or enterprise claiming the deduction furnishes a separate report with its own profit and loss account and balance sheet. For section 46 the relevant part is B1, and the attachment listed is a copy of the agreement with the Central Government, State Government or local authority, wherever applicable.

Can a loss from a specified business be set off against other income?

Not freely. Because the whole capital cost is deducted in one year, a specified business often shows a loss in its early years. Under section 114(1), a loss computed in respect of a specified business referred to in section 46 can be set off only against profits and gains of another specified business. It cannot be set off against salary, house property or an ordinary business. Under section 114(2), the unabsorbed loss is carried forward to the following tax year and set off against profits of any specified business carried on by the assessee, and so on year after year.

Example. In tax year 2026-27 Meena's new cold chain unit shows a loss of Rs 80,00,000 after the section 46 deduction, and she has no other specified business. The loss is carried forward under section 114(2). In 2027-28 the unit earns Rs 30,00,000, which absorbs Rs 30,00,000 of the loss and leaves Rs 50,00,000 to carry forward again. Her rental income in 2026-27 could not absorb any of it.

What are the common mistakes with section 46?

• Including land. Land, goodwill and financial instruments are outside "capital expenditure" for this section.
• Paying cash above Rs 10,000 a day to one person. That payment is disqualified even if the asset is genuine.
• Missing the commencement date. Each row in the Table has its own cut-off, so an older business in a listed category does not qualify.
• Building the business out of an old one. Splitting up or reconstructing a business, or moving in used plant beyond 20%, breaks the conditions.
• Moving the asset too early. Using it for another purpose inside eight years triggers the clawback, unless the sum is taxed under section 26(2)(k) or the company is covered by section 46(10).
• Skipping Form 32. No audit report by the specified date means no deduction is claimed on a safe footing.

Quick reference

Point	Rule	Where
Deduction	Whole capital expenditure, at option	Section 46(1)
Pre-commencement spend	Allowed in year of commencement if capitalised	Section 46(2)
Cash limit	Rs 10,000 a day to one person, otherwise banking or online mode	Section 46(11)(g)(i)
Used machinery cap	20% of total machinery and plant value	Section 46(11)(f)
Use period	Eight years from the year of acquisition or construction	Section 46(9)(a)
Audit report	Form No. 32 before the date in section 63	Rule 66
Affordable housing and semiconductor notification	Form No. 18 and Form No. 19	Rule 36(1)

Where is this in the Act?

• Section 46(1): deduction. 46(2): pre-commencement spend. 46(3): conditions. 46(4) and (5): no double claim.
• Section 46(6): Table of businesses and dates. 46(7): hotel lease-out.
• Section 46(8): section 122(6) and section 140(8) and (13) apply to goods, services or assets held for the specified business.
• Section 46(9) and (10): eight-year use and clawback. 46(11): definitions.
• Section 26(2)(k), section 33: related income and depreciation rules. Section 114: set off and carry forward of specified business losses.
• Rule 36: Forms 18 and 19. Rule 66: Form 32 audit report.

How do CA firms keep track of section 46 claims?

A section 46 claim touches several dates: the commencement year, the eight-year use period, the audit report deadline and any notification applications. Finexo's practice management software helps a CA firm keep those deadlines and client documents in one place per client. It does not compute the deduction or file the forms for you. For another provision with year-wise tracking, see our guide on TDS on rent.

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.