Scientific Research Expenditure Under The New Income Tax Act: A Complete Guide

R&D-driven businesses — pharma companies, manufacturers, biotech firms, even mid-sized engineering outfits running an in-house testing lab — have long relied on a dedicated set of deductions to make research investment tax-efficient. That framework survives under the Income-tax Act, 2025, applicable from 1st April 2026, though it now carries a different section number and a slightly cleaner structure than the old Section 35 ever had.

This article walks through how scientific research expenditure is treated under the new law, what's changed in drafting, and where businesses need to stay careful.

What Qualifies as Scientific Research

The new Act doesn't redefine scientific research in any material way. It continues to cover research in natural sciences, engineering, technology, and even social or statistical research where relevant to notified categories, spanning pure research, applied research, and experimental development. The expenditure must relate to the business carried on by the assessee  research disconnected from your actual line of business generally won't qualify, though results that later benefit the business can still support a claim in limited circumstances.

Section 45 Replaces the Old Section 35

The governing provision has moved from Section 35 to Section 45 of the new Act. The substance is largely preserved: both capital and revenue expenditure incurred on in-house scientific research related to the business are deductible, with one long-standing carve-out expenditure on acquiring land is never allowed, even if the land houses a research facility.

Revenue expenditure such as salaries paid to research staff and the cost of materials consumed in research also qualifies, including such expenditure incurred up to three years before the business formally commences, provided it's certified by the prescribed authority. That pre-commencement expenditure is deemed to have been incurred in the tax year the business actually begins — a useful provision for startups that spend years in R&D before generating revenue.

Practical example: A pharmaceutical company sets up an in-house testing lab two years before launching commercial operations, spending ?40 lakh on staff salaries and lab materials during that period. Once the business commences and the expenditure is certified appropriately, the full ?40 lakh becomes deductible in the tax year of commencement under Section 45.

Contributions to Research Associations and Universities

Section 45 also continues the deduction available for sums paid to approved research associations, universities, colleges, or other institutions engaged in scientific research, provided the recipient is approved and notified by the Central Government in the prescribed manner. A useful protection carries forward too: if an institution's approval is later withdrawn, a deduction already claimed in good faith for a payment made before withdrawal isn't automatically denied.

Businesses should note that weighted deductions on such external contributions — once as high as 150% under the old law for several categories — were scaled back to 100% for most categories under earlier Finance Act amendments, and the new Act doesn't reverse that reduction. Only certain in-house research facilities notified under the erstwhile enhanced-deduction framework continue to enjoy any weighted benefit, subject to prescribed conditions. Businesses assuming an automatic 150% deduction on donations to research bodies are working off outdated assumptions.

Drugs and Pharmaceuticals: A Specific Clarification

Section 45 carries forward a clarification specific to the pharmaceutical sector: expenditure on clinical drug trials, obtaining regulatory approval under any Central, State, or Provincial law, and filing a patent application under the Patents Act, 1970 is treated as scientific research expenditure. This matters significantly for pharma and biotech companies, where regulatory and trial costs often exceed the cost of the underlying laboratory research itself.

Specified Business Capital Expenditure: Section 46

Investment-linked deductions for specified businesses, earlier under Section 35AD, now sit in Section 46. Businesses such as cold chain facilities, warehousing for agricultural produce, hospitals, and hotels can claim 100% deduction of capital expenditure (excluding land, goodwill, and financial instruments) in the year it's incurred, rather than spreading it through depreciation over several years.

The catch that trips up businesses here: assets on which this deduction is claimed carry a lock-in period, and transferring or diverting them to a non-specified use within that period triggers a reversal, adding the deduction back as income in the year of the violation.

Agricultural Extension and Skill Development Projects

Sections 47(1)(a) and 47(1)(b) now govern deductions for expenditure on agricultural extension projects and skill development projects respectively — replacing the old Sections 35CCC and 35CCD. Both continue to require the project be notified and approved by the prescribed authority, and both now stand at 100% deduction of eligible expenditure, following the same rate rationalisation applied to research contributions.

Practical example: A manufacturing company runs an approved in-house skill development programme for ITI-qualified workers, spending ?15 lakh on training infrastructure and instructor costs in a tax year. This qualifies for deduction under Section 47(1)(b), provided the programme retains its notified approval throughout.

Common Mistakes Businesses Make

Businesses frequently claim weighted deductions on contributions to research institutions at outdated rates, not realising the rate rationalisation from earlier Finance Acts continues under the new law. Another recurring issue is claiming deduction for land acquisition costs bundled into an R&D facility's overall capital cost — land always needs to be carved out separately. Companies claiming Section 46 investment-linked deductions also sometimes transfer specified assets before the lock-in period ends, triggering an unexpected reversal they hadn't budgeted for.

Compliance Tips

Maintain separate documentation certifying pre-commencement research expenditure, since the prescribed authority's certification is what allows the deemed-year treatment to apply. Track the approval status of any research association or institution you contribute to, ideally at the time of payment, since later withdrawal of approval shouldn't affect a properly documented claim. And if you're claiming Section 46 benefits on specified business assets, calendar the lock-in period clearly to avoid an inadvertent reversal.

Frequently Asked Questions

Which section now governs scientific research expenditure deductions? Section 45 of the new Act, replacing the old Section 35, with the underlying framework largely unchanged.

Is land acquisition cost deductible as scientific research expenditure? No, land cost is specifically excluded, even when acquired for a research facility.

Are weighted deductions on research contributions still at 150%? No, most categories were rationalised to 100% under earlier amendments, and the new Act retains that lower rate.

What happens if a research institution's approval is withdrawn after a contribution is made? A properly documented deduction claimed before withdrawal isn't automatically denied.

Which section covers investment-linked deductions for specified businesses like cold storage or hotels? Section 46 of the new Act, replacing the old Section 35AD, with the same lock-in restrictions on asset transfer.

Final Word

For R&D-intensive businesses, the tax incentive structure hasn't shrunk under the new Act — it's simply better organised, with clearer drafting around pre-commencement expenditure and pharmaceutical-specific costs. Update your documentation practices and section references before your next filing, and get a professional opinion if a large research contribution or specified business asset is involved.