When it comes to industrial growth in backwards regions, the Indian government has been offering strategic tax incentives to stimulate development. One such powerful provision is Section 32AD of the Income Tax Act, 1961, which provides tax benefits to businesses investing in specific notified areas.
If you're a business owner considering expansion, especially in notified backwards areas, this section might just be the tax-saving opportunity you’ve been looking for.
What is Section 32AD of the Income Tax Act?
Section 32AD of the Income Tax Act offers a 15% deduction on the cost of new plant & machinery acquired and installed in notified backwards areas in certain States. This incentive is over and above the regular depreciation and additional depreciation available under Sections 32 and 32(1)(iia), respectively.
It is designed to encourage industrial investments in economically underdeveloped areas of states like Andhra Pradesh, Bihar, Telangana, and West Bengal.
Objective Behind Section 32AD
The main aim of Section 32AD is to push businesses to:
- Create employment
- Build infrastructure
- Improve industrial activity
- Revive the economy in notified backwards regions
It provides a legal framework for investment in new plants/machinery, making industrial expansion more tax-efficient & aligned with national development goals.
Who Can Claim the Deduction Under Section 32AD?
This benefit is not available to all taxpayers. Only assesses who:
- Are engaged in the manufacturing or production of any article or thing, and
- Set up the plant & machinery in notified backwards areas, and
- Are eligible to claim depreciation,
can avail the benefits of this section.
So, if you’re planning a unit in a backwards area and investing in new equipment, Section 32AD may be your gateway to 15% extra tax savings."
Conditions for Claiming Deduction Under Section 32AD
To successfully claim the deduction, the following conditions must be met:
- New Plant & Machinery Only: Second-hand machinery is not eligible.
- Installed and Operational: The machinery must be put to use during the same previous year.
- Location-specific: The investment should be in a notified backwards area within designated states.
- Manufacturing Focus: The business should be involved in production or manufacturing, not services or trading.
- No Transfer for 5 Years: The machinery should not be transferred for a minimum of five years from the date of installation.
If any of these conditions are violated, the previously allowed deduction may be reversed.
Example to Understand Section 32AD Better
Let’s say you set up a new manufacturing unit in a notified area in Bihar and invest ₹1 crore in new plant & machinery. Under Section 32AD, you are eligible to claim 15% of ₹1 crore, i.e., ₹15 lakh as a deduction, over and above other depreciation benefits.
That’s a pretty smart way to lower your taxable income while contributing to the country’s economic growth.
Other Deductions Along with Section 32AD
Section 32AD doesn’t work in isolation. It often pairs with:
- Section 32: Normal depreciation
- Section 32(1)(iia): Additional depreciation (20%)
Together, these can lead to a whopping 50% reduction in taxable income in the first year itself.
States Covered Under Section 32AD
As of now, the notified backwards areas include districts in:
- Andhra Pradesh
- Bihar
- Telangana
- West Bengal
The Central Government notifies eligible areas from time to time, so it's important to check the latest circulars before making investment decisions."
Documents Required to Claim Section 32AD Deduction
To ensure a smooth deduction claim, make sure you have:
- Invoices for new plant/machinery purchased
- Proof of location in a notified backwards area
- Installation certificates
- Proof of usage commencement
- Depreciation chart reflecting the 32AD component
Final Thoughts
Section 32AD of the Income Tax Act is a powerful tool for business owners looking to optimise taxes while supporting national economic development. By investing in new plant or machinery in notified backwards areas, you can enjoy a 15% tax deduction, improve infrastructure in underserved regions, & still claim your regular depreciation benefits.
If you’re planning such an investment and want to ensure maximum deductions while staying 100% compliant, our experts at Callmyca.com can help. From documentation to filing, we take care of everything—you just focus on growing your business.
