The R&D Super Deduction Every Company Should Know

Research and Development (R&D) has always been the backbone of innovation. For a country like India, where manufacturing and technology are growing rapidly, it is important to motivate companies to invest in scientific research. The government recognized this need and introduced Section 35(2AB) of the Income Tax Act, a provision that allows companies to claim enhanced deductions for R&D spending.

This section has become a powerful tool for corporates to reduce taxable income while contributing towards innovation. By allowing a deduction of 150% of the expenditure incurred on scientific research, it provides both economic & strategic benefits to businesses.

What is Section 35(2AB) of Income Tax Act?

Section 35(2AB) provides weighted deduction for expenditure incurred on approved in-house R&D facilities. This means that when a company spends money on research & development, the government rewards them with a tax deduction greater than the actual expenditure.

For example, if a company spends ₹1 crore on eligible R&D, they can claim ₹1.5 crore as deduction while computing taxable income. This multiplier benefit is what makes Section 35(2AB) unique.

It not only covers operational expenses like salaries of scientists, consumables, and utility bills but also extends to deduction allowed for capital outlay on lab equipments and other capital expenditure.

Objectives of Section 35(2AB)

The provision was designed with clear goals in mind:

1. Encourage Innovation: Push companies to develop new technologies, processes, and products.
2. Promote Self-Reliance: Reduce dependency on foreign technologies.
3. Support Manufacturing: Enable Indian companies to compete globally by innovating locally.
4. Tax Relief: Reduce tax burden for businesses genuinely investing in R&D.

By focusing on scientific research & development activities, Section 35(2AB) directly aligns with India’s vision of becoming a hub of innovation.

Eligibility Criteria under Section 35(2AB)

To claim benefits under this section, companies must meet the following conditions:

• The company should be engaged in manufacture or production of any article or thing (excluding certain industries like tobacco and alcoholic beverages).
• The company must have an in-house R&D facility.
• The facility should be approved by the Department of Scientific & Industrial Research (DSIR).
• Only expenditure incurred on R&D within India is eligible.

This ensures that the benefits go only to genuine corporate research facilities.

Also Read: Tax Deduction on Donations to Approved Scientific Institutions

Expenditure Eligible for Deduction

Under Section 35(2AB), companies can claim deduction on:

• Revenue Expenditure: Salaries of researchers, cost of consumables, electricity, and utilities used for R&D.
• Capital Expenditure: Deduction allowed for capital outlay on lab equipment, testing machinery, and instruments.
• Expenditure of a capital nature on scientific research: Buildings, labs, and facilities created exclusively for R&D purposes.

However, expenses incurred outside India or for routine quality control & market research are excluded.

Weighted Deduction – The Key Highlight

The biggest attraction of Section 35(2AB) is the weighted deduction.

Earlier, the deduction was up to 200% of the expenditure, but it has now been rationalized to 150%. This still provides substantial relief to companies, reducing their taxable income far more than the actual expense incurred."

By allowing companies to claim 150% of expenditure incurred on scientific research, the government essentially encourages higher R&D spending, knowing that businesses will recover part of their investment through tax benefits.

Example of Section 35(2AB) in Practice

Suppose ABC Pharma Ltd invests ₹5 crore in an approved in-house research lab.

• Actual Expense = ₹5 crore
• Eligible Deduction = ₹7.5 crore (150% of 5 crore)

This means the company gets to reduce taxable income by ₹7.5 crore instead of just ₹5 crore. The tax savings can be substantial, especially for large organizations.

Impact on Industries

Section 35(2AB) has had a major impact, particularly in industries like:

• Pharmaceuticals: Clinical research, drug discovery, vaccine development.
• Biotechnology: Genetic research, biofuels, medical equipment.
• Manufacturing: Automotive R&D, industrial machinery, new materials.
• Technology: Electronics, IT hardware, and process innovation.

These industries thrive on scientific research, and the tax incentive plays a vital role in funding innovation.

Also Read: Deduction for Scientific Research Contributions

Procedure to Claim Deduction

1. Set up an in-house R&D facility.
2. Apply for recognition and approval from the Department of Scientific & Industrial Research (DSIR).
3. Maintain proper records of all R&D expenses.
4. Claim deduction while filing Income Tax Return (ITR).

The DSIR also monitors compliance to ensure genuine claims.

Limitations of Section 35(2AB)

While the section is highly beneficial, there are some limitations:

• Only corporates can claim this benefit, not individuals or partnerships.
• Deduction applies only to R&D conducted in India."
• Routine testing & quality checks are excluded.
• Companies must secure DSIR approval before claiming the deduction.

These checks are necessary to avoid misuse of the provision.

Why Section 35(2AB) is Crucial for India’s Growth

India aims to become a global innovation hub. But innovation requires funding, and many companies hesitate to invest in R&D due to high costs.

By providing weighted deduction for scientific research, Section 35(2AB) reduces the financial burden & incentivizes companies to experiment, innovate, and grow.

It also contributes to:

• Job creation for scientists & engineers.
• Development of indigenous technologies.
• Increased competitiveness of Indian products globally.

Section 35(2AB) vs. Other Scientific Research Deductions

The Income Tax Act contains multiple provisions for R&D, but Section 35(2AB) is among the most rewarding.

• Section 35(1)(i): Deduction for revenue expenditure on scientific research.
• Section 35(1)(iv): Deduction for capital expenditure.
• Section 35(2AB): Weighted deduction (150%) for in-house approved R&D facilities.

This makes Section 35(2AB) the most powerful tool for large corporations with in-house laboratories.

Also Read: 100% Deduction on Donations for Scientific Research and Rural Development

Conclusion

Section 35(2AB) of Income Tax Act is a game-changer for corporates investing in R&D. By offering a deduction of 150% of expenditure incurred on scientific research, including capital outlay on lab equipments and capital nature expenses, it fuels innovation while reducing tax liability.

For India to become self-reliant and globally competitive, provisions like Section 35(2AB) are essential to encourage innovation-led growth.

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