If you run a business, you already know this — innovation costs money.
But here’s the good part: the government wants you to innovate. It’s literally built a tax rule that rewards you for spending on research and development.
That magic rule is Section 35(1) of the Income Tax Act, 1961.
Think of it as the Income-tax Act’s way of saying, “Hey, if you invest in science, we’ll invest in you.”
Let’s unpack this section in plain English — no jargon, just how it actually helps you save money and grow faster.
What Exactly is Section 35(1)?
In short, Section 35(1) deals with expenditure on scientific research.
It lets taxpayers — whether you’re a startup founder, manufacturer, or consultant — deduct money you spend on scientific research & development from your taxable income.
So basically, if your company is building new tech, improving products, or experimenting with process innovation, those costs don’t just vanish into thin air."
They can directly reduce your tax bill.
This section provides for the deduction of expenses incurred on scientific research, whether it’s running your own R&D lab or contributing to an approved research institution.
Why This Section Even Exists
Let’s be honest — research is expensive & risky.
You might spend months testing ideas and still fail. So to keep businesses motivated, the law steps in & says,
“Go ahead and try. We’ll cut you some slack on taxes.”
That encouragement is powerful. It keeps India’s pharma companies, tech startups, and engineering firms moving forward.
Without such provisions, many would play safe & skip innovation altogether.
Also Read: 100% Deduction for Scientific Research Contributions
Different Ways You Can Claim It
Section 35(1) is not a single deduction — it’s a family of clauses that cover different research situations. Here’s how each works.
1️⃣ Research You Do Yourself — Section 35(1)(i)
If you carry out R&D in-house for your own business, this part applies.
All expenses linked to that research — salaries of scientists, lab equipment, chemicals, electricity, software licenses, testing costs — can be deducted.
Yes, 100 percent.
Even expenditure of a capital nature on scientific research (like machines or apparatus) is allowed, except land or buildings.
So if you spent ₹30 lakh on setting up a testing lab, you can deduct that entire amount from your taxable profits this year.
Pretty sweet, right?
2️⃣ Donations or Payments to Approved Institutions — Section 35(1)(ii) & (iia)
Not every company has a lab or scientists on payroll.
So the law says — that’s fine, you can still support research by funding those who do it.
Under Section 35(1)(ii), if you pay an approved university or institution for scientific research, you get a deduction for that amount.
Similarly, Section 35(1)(iia) covers payments to approved companies engaged in scientific research.
This clause offers a 100 % deduction for payments made to companies engaged in scientific research, as long as they have government recognition.
It’s like CSR with a financial return — you fund science, & the taxman thanks you for it.
3️⃣ Social & Natural Science Research — Section 35(1)(iii)
Research isn’t just test tubes & formulas. It can be about education, environment, economics, or society too.
If you contribute to an approved institution working in these fields, you still get the deduction.
For instance, funding a study on climate-resilient agriculture or financial literacy in rural India can qualify.
Innovation has many forms — the law recognizes them all.
4️⃣ Foreign Research Connected to Indian Business — Section 35(1)(iv)
Sometimes you need foreign labs for testing or validation.
If the work is directly linked to your Indian operations, the expense still counts.
For example, an Indian pharma firm testing a drug in Singapore for local compliance can claim that cost here.
Also Read: Deduction on Capital Expenditure for Scientific Research
Who Can Claim This Deduction
Any taxpayer carrying on business or a professional practice can use this section — from a one-person startup to a listed company.
You don’t need to be a scientist; you just need to be investing in knowledge creation.
Industries that benefit the most include:
- Pharma and biotech firms
- Engineering & automotive companies
- IT and AI startups
- Renewable energy businesses
- Consulting & design firms
Even doctors setting up medical research labs can claim it if it’s linked to their profession.
Capital vs Revenue Expenses — What Counts and What Doesn’t
Here’s where people usually get confused.
- Revenue expenses — day-to-day running costs like staff salaries, consumables, electricity, travel — fully deductible.
- Capital expenses — big investments in equipment or assets — also deductible (except land and buildings)."
That means you can buy a ₹20 lakh research instrument, claim the deduction now, & avoid the usual depreciation over years.
So yes, permits tax deductions for costs associated with scientific research — & it’s as straightforward as it sounds.
Real-Life Example — How It Works
Let’s say your company “EcoTech Solutions” spends ₹40 lakh developing a water-saving device. You also donate ₹10 lakh to an approved engineering college for related research.
Under Section 35(1)(i) & (ii), you can deduct the entire ₹50 lakh from your taxable income. If your corporate tax rate is 25 %, that’s a saving of ₹12.5 lakh straight.
That’s money you can reinvest in marketing, hiring, or even more R&D.
Why This Section Matters More Than Ever
With AI, green tech, & digital products booming, R&D is no longer optional — it’s the core of business survival.
Section 35(1) is basically the government telling you:
“Go build something new. We’ll take care of some of the taxes.”
And that’s a pretty good deal if you ask me.
Also Read: Expenditure on Agricultural Extension Projects
Documentation You Need
Tax benefits come with responsibility. Keep these handy:
- Detailed records of research expenses (invoices, bills, salary breakups)
- Proof of payment to approved institutions or companies
- DSIR (Department of Scientific & Industrial Research) approval if required
- Project reports linking the research to your business
If everything is traceable & genuine, your claim is rock solid.
Common Mistakes Taxpayers Make
- Not linking research to business: It must relate to your core operations.
- Mixing capital & revenue costs: Record them separately."
- Missing approval letters: Payments to non-approved entities don’t qualify.
- Claiming double benefit: You can’t take depreciation on an asset if you’ve already claimed it under Section 35(1).
A CA who understands research deductions can save you a lot of headache (and penalty letters).
How It Fits with Other Tax Sections
The Income Tax Act has an entire ecosystem of R&D benefits.
Section 35(1) is the foundation. Then you have:
- Section 35(2AB) for weighted deductions on in-house R&D,
- Section 35AD for capital expenditure in specific industries,
- Section 10(46A) for certain institutions getting income exemption.
Together, they make India one of the most innovation-friendly tax regimes in Asia.
The Human Side of This Law
When you strip away the legal language, this section is about encouragement.
It says to entrepreneurs, “Experiment. Create. Fail if you must. We’ll reward your effort.”
That’s rare in tax law. Most provisions penalize; this one motivates.
So whether you’re developing eco-friendly materials, AI software, or medical devices, this law is your friend.
Also Read: Deduction for Expenditure on Skill Development Projects
Final Takeaway
To sum it up — Section 35(1) of Income Tax Act lets you turn research spending into tax savings.
It covers in-house projects, funding institutions, & even donations to recognized research bodies.
It provides for the deduction of expenses incurred on scientific research, offers a 100 % deduction for payments made to companies engaged in scientific research, and permits tax deductions for costs associated with scientific research.
In plain terms — if you’re building the future, you deserve to pay less tax today.
Not sure if your R&D expenses qualify for deduction? You might be leaving money on the table.
Let our experts at Callmyca.com review your accounts & help you claim every eligible benefit under Section 35(1).
Innovation is your strength — we’ll make sure you get rewarded for it.
