Business Deductions/ Depreciation in Draft I-Tax Rules 2026: Exceptions, Compliance

08/02/2026 Income Tax, Updates

The Draft Income Tax Rules, 2026 released for public consultation by the Central Board of Direct Taxes significantly streamline the procedural framework governing computation of business income. This segment directly affects small and medium enterprises as well as corporate taxpayers, as it covers depreciation, allowance of deductions, restrictions on cash payments, and audit-linked compliance requirements.

While the eligibility for deductions and allowances flows from the Income-tax Act, 2025, the Draft Rules prescribe the operational conditions, exceptions, and reporting formats. These provisions are proposed to apply from 1 April 2026, that is, from financial year 2026-27, subject to final notification.

Consolidation of Business Computation Rules

Under the Income-tax Rules, 1962, provisions relating to depreciation, cash payment restrictions, and deduction-related audit reports were spread across multiple rules. The Draft Income Tax Rules, 2026 consolidate these into a more logical and accessible structure. The business income framework under the draft rules broadly addresses:

  • Depreciation and block of asset methodology.
  • Procedural conditions for claiming specified business deductions.
  • Restrictions on cash payments and prescribed exceptions.
  • Reporting and certification requirements for preliminary and other capital expenditures.

This consolidation improves compliance visibility and reduces cross-referencing complexity.

Depreciation and Block of Assets: Rule 25

Rule 25 of the Draft Income Tax Rules, 2026 governs depreciation for assets used in business or profession. Key features include:

  • Continuation of the block of asset concept for computing depreciation.
  • Allowance of depreciation on written down value at prescribed rates.
  • Uniform treatment of tangible and intangible assets within respective blocks.
  • Alignment with conditions stipulated under the Income-tax Act, 2025, including actual use and ownership criteria.

Although the fundamental depreciation framework remains unchanged, the rule eliminates redundant drafting and provides a cleaner procedural structure. Accurate asset classification into appropriate blocks remains critical to avoid disallowances.

Conditions for Claiming Specific Business Deductions

Certain deductions under the Income-tax Act, 2025 are conditional upon fulfilment of prescribed procedural requirements. The Draft Income Tax Rules, 2026 clarify these operational aspects. These include:

  • Deductions requiring furnishing of certificates or statements.
  • Time-bound compliance for claiming capital or revenue expenditure.
  • Mandatory certification by an accountant for specified deductions.

The rules reinforce that deduction eligibility is compliance-driven and must be supported by prescribed documentation.

Cash Payment Restrictions and Prescribed Exceptions: Rule 26

Rule 26 specifies cases and circumstances in which business payments exceeding the prescribed monetary threshold may be made otherwise than through banking channels or notified electronic modes. Key aspects include:

  • Retention of the general restriction on cash payments for business expenditure.
  • Recognition of specific exceptions based on practical business needs.
  • Alignment with policy objectives of traceability and digitalisation of payments.

For cash-intensive businesses and SMEs, careful evaluation of exception eligibility is essential, as non-compliance continues to attract disallowance consequences.

Preliminary Expenses and Capital Expenditure Reporting: Rule 27 and Prescribed Form/Statement

The Draft Income Tax Rules, 2026 continue to mandate reporting for deductions relating to preliminary expenses. Rule 27 requires:

  • Furnishing of a statement in the prescribed form detailing preliminary expenses.
  • Disclosure of nature, amount, and amortisation period.
  • Certification where applicable.

This provision is particularly relevant for newly incorporated entities, start-ups, and businesses undertaking expansion, amalgamation, or restructuring.

Deduction-Linked Audit Reports: Rule 28

Rule 28 prescribes the form and manner of furnishing audit reports for claiming specified deductions under the Income-tax Act, 2025. Key compliance points include:

  • Mandatory submission of audit reports in prescribed forms.
  • Certification by an accountant.
  • Synchronisation of audit reporting with deduction claims in returns.

This reinforces the role of audit-backed verification for incentive-based and high-value deductions.

Practical Impact on Businesses

The rationalised framework under the Draft Income Tax Rules, 2026 is expected to:

  • Improve certainty in depreciation computation.
  • Strengthen discipline around deduction eligibility.
  • Increase reliance on traceable and electronic payment methods.
  • Heighten the importance of audit and documentation readiness.

Businesses will need to ensure that accounting systems, payment processes, and audit workflows are aligned with the revised procedural structure.

Areas Requiring Early Attention

Before the commencement of financial year 2026-27, businesses should:

  • Review asset registers and depreciation block classifications.
  • Evaluate cash payment practices against prescribed exceptions.
  • Map deduction claims to corresponding audit and reporting obligations.
  • Update internal controls and documentation processes.

Early alignment will reduce the risk of disallowances and compliance bottlenecks once the rules are notified.

Key Practical Limitations and Compliance Risks

Although the draft rules on business deductions, depreciation, and allowances offer improved structural clarity, certain limitations persist. The continued dependence on fixed depreciation rates and block-of-asset classification provides administrative simplicity but may not adequately capture rapid asset obsolescence, particularly in technology-driven businesses. Cash payment exceptions under Rule 26 remain restrictive and may not fully accommodate operational realities of smaller enterprises in cash-intensive sectors. In addition, deduction-linked audit and reporting requirements, while strengthening verification, increase compliance costs and procedural burden for SMEs. The framework is directionally sound, but its effectiveness will hinge on pragmatic interpretation, clear administrative guidance, and uniform application at the assessment stage.

Conclusion

The business deductions, depreciation, and allowances provisions under the Draft Income Tax Rules, 2026 represent a consolidation-oriented reform rather than a substantive policy shift. By streamlining depreciation rules, clarifying cash payment exceptions, and reinforcing audit-linked deduction claims, the draft framework aims to balance ease of compliance with robust revenue safeguards.

For SMEs and corporate taxpayers alike, the real impact will lie in disciplined execution, accurate reporting, and timely system readiness from financial year 2026-27 onward.

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