Tax Benefits for Research and Development in India
India has long been a spot for businesses to conduct research and development activities.
Many companies including global corporations set up certain types of R&D centers in India because of all the incentives the government provides.
One of the significant benefits of conducting scientific R&D in the country is the research and development tax incentive that businesses get.
Incentives or tax credits for R&D activity is when companies can claim complete, partial, or extra deductions on the expenses they incurred for scientific research and development.
Claiming research and development tax deduction is a way businesses can benefit as per section 35 of the Income Tax Act.
But unfortunately, many businesses still do not know about these benefits or may not know whether they are applicable to their research and development activity or not.
To understand whether you can claim tax benefits for research and development in India you must know the type of R&D your business is conducting and then check whether you can utilize these incentives.
Research and development tax credit is a benefit that only entities following proper guidelines and conducting certain types of R&D can avail.
A company incurring in-house R&D expenses as an eligible taxpayer can get 100% of the expenses deducted if it is not approved by DSIR(Department of Scientific and Industrial Research).
But if the R&D activity is approved by the DSIR then a weighted deduction of 200% of the expenses can be redeemed till 31st March 2017.
When a taxpayer donates or contributes to a Research Association, University, or college conducting scientific research, social science, or statistical research then the weighted deduction for these expenses is 125-175% of the contribution if they have obtained approval from the income tax authority.
Also, when a taxpayer contributes to companies that are involved specifically in scientific research then they can get a weighted deduction of 125% of the expense incurred after getting approval from the income tax authorities.
There are many prerequisites to the weighted super deductions that can be claimed by a taxpayer as per the benefits under section 35(2AB):
• The businesses that are involved in biotechnology or the manufacture of goods other than the ones specified in the Eleventh Schedule can opt for a weighted deduction.
• Companies can get direct and indirect tax benefits on expenses incurred on ‘in-house’ R&D.
• An R&D center must obtain valid recognition from the DSIR and also maintain a separate account for each one of their centers to reflect the expenses in the Annual Report.
• For in-house R&D centers, they must be located in separate earmarked areas or buildings in India with an exclusive workforce of their own.
• Any R&D facility should not conduct activities related to market research, sales, testing, promotion, quality control, commercial production, etc.
• If a company disposes of the R&D assets used to conduct the research then the sale amount shall be deducted from the weighted tax deduction.
Under section 35 of the Income Tax Act, of 1961 businesses and individuals who are taxpayers can claim research and development tax deductions.
Not any and every type of business can avail of these benefits and not every type of research is applicable for tax benefits.
Mostly scientific research and development, and in some cases social science and statistical research, expenses by a business or individual taxpayer that can enjoy the tax deductions.
In most cases, it doesn’t matter whether the expense incurred or the amount contributed for R&D is directly affecting the business or not for it to be tax deductible.
Are you a business owner? Check out our article on corporate tax filing for small business in India to get a step by step idea on how to file company tax returns in India.
Listed below are different types of expenditures on research and development and amount of tax benefit you claim for it.
When a business uses its revenue as expenditure to conduct scientific research inside its own premises with the aim of developing the business or a scientific facility, then 100% of this in-house expenditure is tax deductible.
When a company makes a capital expenditure for the purpose of scientific research, then it is 100% tax deductible. The exception, in this case, is that capital expenditure for the purchase of land is not allowed as a deduction.
When a company is yet to commence a business but incurs revenue and capital expenses for scientific research 3 years before the commencement of the business, then 100% of the amount in the previous year in which the business commenced is tax deductible.
If any particular amount is paid by a taxpayer such as a normal individual, company, firm, HUF, or another person to an Indian entity to be used for approved scientific research regardless of whether it is in relation to the business or not, then 100% of the expense is tax deductible.
If your business makes an expense as a contribution to a Scientific Research Association whether the research is related to the business or not, the amount is 100% tax deductible from AY 2021-22 and 150% of the amount is deductible for expenses from AY 2018-19 to AY 2020-21.
If the expense contribution from your business is to an approved college, university, or another institution for the purpose of scientific research regardless of whether it is related to your business or not, then 100% of the expense is tax deductible beginning AY 2021-22 and 150% of the amount is deductible for expenses from AY 2018-19 to AY 2020-21.
And if your business has an expense contribution to an approved college, university, or another institution that is to be used for social sciences or statistical research, then 100% of the amount is tax deductible beginning AY 2018-19.
Your business can claim a research and development tax deduction for expenses as payment contributions towards a national laboratory, university, IIT, or a specified person who is approved by the relevant authority.
The amount deductible is 100% from AY 2021-22 and 150% for expenses between AY 2018-19 till Ay 2020-21.
Capital or revenue expenses that are made in-house for research and development by a business that is engaged in biotechnology or the manufacturing of goods (except those that are specified in the Eleventh Schedule) can claim 100% of the amount as a tax credit from AY 2021-22 and 150% for expenses incurred from AY 2018-19 to Ay 2020-21.
There are different kinds of forms that businesses must fill out and get approved so that they become eligible to get all the relevant tax benefits for research and development in India:
• Form No. 3CF-I - For claiming a research and development tax deduction by a taxpayer contributing to a Scientific Research Association, this form must be filled.
• Form No. 3CF-II - To claim a research and development tax deduction by a taxpayer contributing to a college, university, or other institution, this form must be filled out.
• Form No. 3CFIII - This form must be filled by a taxpayer for approval of deductions whose company is registered in India and whose main objective is research and development.
• Form No. 3CG - This application form must be completed to get the approval of deductions for contributions made to a University, IIT, National Laboratory, or specified person by a specified authority.
• Form No. 3CK - This form is for cooperation and acts as an agreement with the DSIR(Department of Scientific and Industrial Research) for an in-house R&D facility and auditing of the accounts maintained for that facility.
The income tax law in India has evolved over time to help businesses and individuals gain many benefits. It is wise to stay updated with the latest amendments and how they might help your business.