Prospecting for Minerals and Mineral Oils: Tax Deduction under the Income Tax Act 2025 (Sections 51 and 54)
Under the Income Tax Act 2025, an Indian company or a resident non-company that spends money on prospecting for a listed mineral, or on developing a mine, can deduct one-tenth of that expenditure in each of ten tax years, starting with the year commercial production begins (section 51). Mineral oil is handled separately: section 54 allows deductions on the terms of an agreement the Central Government has signed with the explorer and laid before Parliament.
This guide covers who qualifies, which minerals count, how the one-tenth instalment works, what happens when income is too low to absorb it, the audit report needed from non-companies, and how section 54 deals with transfers. All figures come from the Act as amended by the Finance Act, 2026 (effective 1 April 2026) and the Income-tax Rules, 2026. It is information, not tax advice.
What is the deduction for prospecting minerals under section 51?
Section 51(1) gives a deduction equal to one-tenth of the qualifying expenditure in each of the "relevant tax years". The relevant tax years are the ten tax years beginning with the year of commercial production (section 51(10)(c)). The year of commercial production is the tax year in which commercial production of the mineral starts as a result of the prospecting operations (section 51(10)(b)).
The deduction spreads the expenditure over the relevant tax years, subject to the cap described below.
Who can claim the section 51 deduction?
Section 51(1) names two kinds of assessee engaged in prospecting for, or extraction or production of, any mineral:
- an Indian company; or
- a person other than a company who is resident in India.
A non-resident non-company is outside the section. A person other than a company or a co-operative society also has to satisfy the audit condition in section 51(7), covered further down.
Which expenditure qualifies, and what is left out?
Section 51(2) covers expenditure incurred wholly and exclusively on prospecting operations, or on developing a mine or other natural deposit, for a mineral or group of associated minerals in Schedule XII. The expenditure must have been incurred in the year of commercial production or in any of the four tax years immediately before it. "Operation relating to prospecting" means exploring, locating or proving deposits, and it includes operations that turn out to be infructuous or abortive (section 51(10)(a)).
The qualifying amount is then adjusted:
- Reduced by expenditure met directly or indirectly by any other person or authority, and by sale, salvage, compensation or insurance money received for property or rights created by the expenditure (section 51(3)).
- Excluded: cost of acquiring the site of the mineral source or any rights in it; cost of acquiring the deposits or rights in them; and capital expenditure on a building, machinery, plant or furniture that earns depreciation under section 33 (section 51(4)).
Section 51(9) bars a double claim. If a deduction under this section is allowed for an expenditure, no other provision of the Act gives a deduction for the same expenditure in any year.
Which minerals are covered by Schedule XII?
Schedule XII has two parts. Part A lists individual minerals (items 1 to 36), such as aluminium ores, coal and lignite, copper, gold, gypsum, iron ore, zinc and, from 1 April 2026, graphite, lithium bearing minerals and potash. Part B lists 16 groups of associated minerals, such as "Iron, Manganese, Titanium, Vanadium and Nickel minerals" (group 2) or "Limestone, Dolomite and Magnesite" (group 9). Check the exact entry in the Schedule before claiming; a mineral that is not named in Part A or in a Part B group is outside section 51.
| Schedule XII | What it lists | Examples |
|---|---|---|
| Part A | Single minerals (36 items) | Gold, copper, iron ore, coal and lignite, graphite, lithium bearing minerals |
| Part B | Groups of associated minerals (16 groups) | Coal, Fire clay and Shale (group 12); Tin and Tungsten minerals (group 8) |
How much can be deducted in a year? The lower-of rule
Under section 51(5), the deduction for a relevant tax year is the lower of:
- the instalment, that is one-tenth of the net qualifying expenditure (after the section 51(3) reductions and section 51(4) exclusions); and
- the amount that brings to nil the income (before this deduction) of that year from commercial exploitation of the mine or deposit for which the expenditure was incurred.
So the deduction cannot create or increase a loss from that mine in the year. If part of an instalment is not allowed, it is carried forward and added to the next year's instalment, and so on, but no instalment is carried forward beyond the tenth tax year from the year commercial production began (section 51(6)).
Worked example 1: instalments with a carry-forward (tax year 2026-27 onward)
Assumptions: Ravi Minerals Pvt Ltd, an Indian company, spends on prospecting and mine development for a Schedule XII mineral. Commercial production starts in tax year 2026-27. Figures are illustrative.
| Step | Item | Rs |
|---|---|---|
| 1 | Spent in 2024-25 (within four preceding years) | 40,00,000 |
| 2 | Spent in 2025-26 | 50,00,000 |
| 3 | Spent in 2026-27 (year of commercial production) | 30,00,000 |
| Total spent | 1,20,00,000 | |
| 4 | Less: depreciable plant, excluded by section 51(4)(c) | (10,00,000) |
| 5 | Less: cost of buying rights over the deposit, excluded by section 51(4)(b) | (6,00,000) |
| 6 | Less: government grant towards the work, section 51(3) | (3,00,000) |
| 7 | Less: salvage money received, section 51(3) | (1,00,000) |
| Net qualifying expenditure (120 - 10 - 6 - 3 - 1 lakh) | 1,00,00,000 | |
| Instalment (one-tenth) | 10,00,000 |
Now apply the lower-of rule year by year. Income here means income from the mine before this deduction.
| Tax year | Instalment due (incl. brought forward) | Mine income before deduction | Deduction allowed (lower) | Carried forward |
|---|---|---|---|---|
| 2026-27 | 10,00,000 | 4,00,000 | 4,00,000 | 6,00,000 |
| 2027-28 | 10,00,000 + 6,00,000 = 16,00,000 | 25,00,000 | 16,00,000 | 0 |
| 2028-29 | 10,00,000 | 7,00,000 | 7,00,000 | 3,00,000 |
The remaining years continue the same way. Whatever is still unclaimed after the tenth relevant tax year (2035-36 in this example) lapses.
Does a non-company need an audit report?
Yes. For a person other than a company or a co-operative society, section 51(7) allows the deduction only if:
- the accounts for the tax year or years in which the expenditure was incurred were audited by an accountant before the specified date; and
- the audit report is furnished for the first tax year in which the deduction is claimed, signed and verified by the accountant, in the prescribed form and by the prescribed date.
Rule 28 prescribes Form No. 6 for this report. The "specified date" is defined in section 63 as one month before the due date for furnishing the return under section 263(1).
What happens on amalgamation or demerger?
If an Indian company's undertaking entitled to the deduction is transferred to another Indian company in an amalgamation or demerger before the ten years are over, the original company gets no deduction for the year of the transfer. The amalgamated or resulting company then steps into the section as if the change had not happened (section 51(8)).
How does section 54 treat mineral oil prospecting?
Section 54 applies to a "specified oil exploration business". That is a business of prospecting for, or extracting or producing, mineral oils where all three conditions hold (section 54(2)):
- the Central Government has entered into an agreement with the assessee;
- the agreement is for association or participation of the Central Government or a person it authorises; and
- the agreement is laid before each House of Parliament.
The deductions, computed under the head "Profits and gains of business or profession", are (section 54(3)):
| Period | Deduction |
|---|---|
| Before commercial production begins | Expenditure on infructuous or abortive exploration in respect of any surrendered area |
| After commercial production begins | Expenditure (whether before or after production) on drilling or exploration activities or services, or on physical assets used for them |
| Year production begins and later years as the agreement specifies | Depletion of mineral oil in the mining area |
The deductions can be in lieu of, or in addition to, other allowances under the Act, as the agreement specifies, and they are computed in the manner the agreement lays down. The rest of the Act is deemed modified to that extent (section 54(4)). In practice, the agreement is the first document to read.
What if a mineral oil business or interest is transferred?
When the business, or an interest in it, is wholly or partly transferred as the agreement permits, section 54(5) uses three amounts:
- A = proceeds of the transfer, so far as they are capital sums;
- B = total expenditure incurred on the business or to obtain the interest;
- C = expenditure incurred that remains unallowed.
Where A is greater than C, no deduction is allowed afterwards for the expenditure still unallowed, in the transfer year or later (section 54(5)(b)(iii)). If the business or interest no longer exists in the year of transfer, section 54(5) applies as if it did (section 54(6)). On an amalgamation or demerger into an Indian company, section 54(5) does not apply to the transferor and continues to apply to the successor (section 54(7)).
Worked example 2: transfer of an oil exploration interest under section 54(5)
Assumptions: Meena Petroleum Ltd transfers part of its interest in a licensed block, as its agreement permits, in tax year 2026-27. Total expenditure on the business and interest (B) is Rs 8,00,00,000. Expenditure still unallowed (C) is Rs 2,00,00,000. Three alternative sale prices (A, capital sums) are shown.
| Case | A (Rs) | Test | Result |
|---|---|---|---|
| 1 | 1,50,00,000 | A less than C | Deduction of C - A = 2,00,00,000 - 1,50,00,000 = Rs 50,00,000 |
| 2 | 5,00,00,000 | A more than C, less than B | Business profit of A - C = 5,00,00,000 - 2,00,00,000 = Rs 3,00,00,000 |
| 3 | 9,00,00,000 | A more than B | Business profit of only B - C = 8,00,00,000 - 2,00,00,000 = Rs 6,00,00,000 |
Real-life scenarios
Scenario 1: a proprietor with no audit. Ravi, a resident individual running a stone quarry as a sole proprietor, spent Rs 20 lakh on proving a deposit of a Schedule XII mineral and now starts production. He is a "person other than a company", so he needs the audit of the accounts for the years the expenditure was incurred, done before the specified date, and Form No. 6 furnished in the first year he claims the deduction. Without it, section 51(7) denies the deduction.
Scenario 2: a company that merges. Meena Mining Pvt Ltd is claiming instalments in year 4 when its undertaking merges into Ravi Resources Pvt Ltd, an Indian company. Meena Mining gets no deduction for the merger year. Ravi Resources continues the remaining instalments as the section requires (section 51(8)).
Scenario 3: the same cost claimed twice. A company allowed Rs 10 lakh a year under section 51 for three years then tries to include the same expenditure in a separate deduction under another provision. Section 51(9) rules this out for the same or any other year.
Common mistakes
- Claiming the full expenditure in the first year. The deduction is one-tenth a year, and capped by that year's income from the mine.
- Including the price paid for the mine site, deposit or rights, or depreciable plant, in the pool. Section 51(4) excludes them.
- Forgetting to net off grants, subsidies and salvage or insurance receipts before dividing by ten (section 51(3)).
- Assuming the carry-forward lasts forever. It stops with the tenth tax year from the year commercial production began.
- Skipping Form No. 6 as a non-company. The deduction is conditional on it.
- Treating section 54 like section 51. Under section 54, the agreement with the Government decides what is allowed and how it is computed.
Quick reference
| Point | Section 51 (minerals) | Section 54 (mineral oils) |
|---|---|---|
| Who | Indian company; resident non-company | Assessee with a Central Government agreement laid before Parliament |
| Amount | One-tenth a year, capped by income from the mine | As per section 54(3) and the agreement |
| Period | Ten tax years from commercial production | As the agreement specifies |
| Carry-forward | Up to the tenth tax year | Not applicable as such; transfer rules in section 54(5) |
| Audit | Non-company: audit before the specified date, Form No. 6 (rule 28) | None stated in the section |
| Merger or demerger | Successor Indian company continues (section 51(8)) | Successor continues (section 54(7)) |
Where this is in the Act
- Section 51: amortisation of expenditure for prospecting certain minerals (sub-sections (1) to (10)).
- Schedule XII, Parts A and B: minerals and groups of associated minerals.
- Section 54: business of prospecting for mineral oils.
- Section 63: tax audit, including the definition of "specified date".
- Rule 28: Form No. 6, audit report for section 51(7) (and section 44(6)).
A similar spread-over-years deduction for another cost is explained in amortisation of preliminary expenses under the Income Tax Act 2025.
For a CA firm, the hard part is tracking ten years of instalments, carry-forwards and audit-report dates for each mining client. Finexo's practice management software can hold those deadlines and recurring tasks across your client book. It does not compute the deduction for you.
Frequently Asked Questions
What is the tax deduction for prospecting minerals under the Income Tax Act 2025?
Section 51 allows one-tenth of qualifying prospecting and mine development expenditure as a deduction in each of ten tax years, starting with the year commercial production begins. It is available to Indian companies and resident non-company assessees.
Can the whole prospecting expenditure be claimed in one year?
No. Each year's deduction is the lower of one-tenth of the net expenditure and the income from the mine that year (section 51(5)). Any unabsorbed instalment carries forward but not beyond the tenth tax year (section 51(6)).
Is an audit report needed to claim the section 51 deduction?
A person other than a company or a co-operative society must have the accounts audited by an accountant before the specified date and furnish the report in Form No. 6 for the first year of the claim (section 51(7), rule 28).
Which minerals are covered by section 51?
Those named in Schedule XII: Part A lists single minerals and Part B lists groups of associated minerals. A mineral not named there does not qualify.
What is a specified oil exploration business under section 54?
A business of prospecting for, or extracting or producing, mineral oils under an agreement with the Central Government for its association or participation, where the agreement is laid before each House of Parliament (section 54(2)).
How is a transfer of an oil exploration interest taxed?
Section 54(5) compares the capital proceeds (A) with unallowed expenditure (C) and total expenditure (B). If A is below C the difference is deductible; if A is above C the profit is A - C, capped at B - C.