Scientific Research Expenditure Deduction Rules 2026: Complete Guide to Rules 29-30 Under Section 45

If your company invests in research and development, the deductions available under the Income Tax Act can significantly reduce your tax liability. With the Income Tax Act, 2025 replacing the 1961 Act, and the Draft Income Tax Rules, 2026 released by CBDT on 7 February 2026, the R&D deduction framework has been restructured under Section 45-replacing the earlier Section 35.

Rules 29 and 30 of the new draft rules prescribe the prescribed authorities, approval processes, forms, audit requirements, and compliance conditions for claiming these deductions. This guide covers both rules comprehensively-who qualifies, what approvals are needed, which forms to file, and what activities are excluded.

What Is the Scientific Research Deduction Under the New Act and Why Does It Matter?

Scientific research expenditure deduction, under Section 45 of the Income Tax Act, 2025, allows businesses to claim deductions for capital and revenue expenditure incurred on research related to their business. This includes salaries of R&D employees, materials used in research, and capital assets acquired for research purposes-excluding land costs.

The implementing rules-Rule 29 (for in-house R&D and pre-commencement expenses) and Rule 30 (for sponsored research programmes)-prescribe the detailed procedures for obtaining approval, maintaining records, and filing reports. For companies that rely on professional income tax return filing (https://www.patronaccounting.com/income-tax-return) services, understanding these provisions ensures R&D deductions are claimed correctly and survive assessment scrutiny.

Section 45 replaces the earlier Section 35 of the 1961 Act. The core incentive structure is retained, but the forms, rule references, and procedural requirements have been updated to align with the new Act’s terminology and electronic filing framework.

Key Terms You Should Know

• Section 45: The provision under Income Tax Act, 2025 governing deductions for scientific research expenditure. Replaces Section 35 of the 1961 Act.
• Rule 29: Prescribes the authority and approval process for deductions under Sections 45(1)(a)(ii) (pre-commencement expenses) and 45(2) (in-house R&D by companies).
• Rule 30: Prescribes the authority and approval process for sponsored research programmes under Section 45(3)(c).
• DSIR: Department of Scientific and Industrial Research, Government of India-the prescribed authority for in-house R&D approvals under Section 45(2).
• In-House R&D Facility: A research and development unit set up within the company, approved by the Secretary, DSIR, for claiming deductions on eligible expenditure.
• Form 11: The application form for obtaining approval of in-house R&D facility from DSIR.
• Form 12: The report form in which DSIR furnishes approval details (Part A) and expenditure quantification (Part B) to the jurisdictional Chief Commissioner.
• Form 13: The annual audit report of the in-house R&D facility’s separate books, to be furnished to DSIR.

Who Can Claim Scientific Research Deductions Under Section 45?

Section 45 provides deductions to different categories of taxpayers:

1. Any Person Carrying on Business (Section 45(1))

Any taxpayer can claim deductions for capital expenditure (excluding land) and revenue expenditure incurred on scientific research related to their business. Pre-commencement expenses on salaries and materials within three years before starting business are also deductible if certified by the prescribed authority.

2. Companies with Approved In-House R&D Facilities (Section 45(2))

Companies engaged in biotechnology, manufacturing of drugs/pharmaceuticals, electronics, telecommunications, chemicals, or defence equipment can claim deductions on expenditure incurred on DSIR-approved in-house R&D facilities. This requires entering into an agreement with DSIR and complying with audit and reporting conditions under Rule 29. Businesses requiring statutory audit services (https://www.patronaccounting.com/statutory-audit) should coordinate their R&D facility audit with the statutory audit timeline.

3. Payments to Approved Research Entities (Section 45(3))

Taxpayers can claim deductions for payments made to approved research associations, universities, national laboratories, IITs, or specified persons for scientific research programmes approved under Rule 30. The sponsored research must follow strict approval, reporting, and audit requirements.

4. Contributions to National Laboratories and Universities (Section 45(3)(a) and (b))

Payments to government-approved research institutions with the specific object of scientific research or for social science/statistical research are deductible under specific sub-sections, subject to approval conditions.

Legal Framework: Old Provisions vs New Provisions

The most significant procedural change is the introduction of standardised numbered forms (11 through 14) and the requirement for fully electronic filing of DSIR reports and audit reports to the jurisdictional Chief Commissioner.

How to Claim Scientific Research Deductions Under Rules 29 and 30: Step-by-Step

For In-House R&D (Rule 29):

1. Set up the in-house R&D facility. The facility must be dedicated to genuine scientific research-not market research, sales promotion, quality control, testing, commercial production, style changes, or routine data collection.
2. Apply to DSIR in Form 11. Submit the application electronically to the Secretary, DSIR for approval of the in-house R&D facility under Section 45(2).
3. Enter into an agreement with DSIR. The company must sign an agreement with the prescribed authority for cooperation in research and development, and commit to maintenance of books, audit, and reporting.
4. Receive approval in Form 14. DSIR issues the approval order within two months from the end of the month in which the application is received. If rejection is proposed, a hearing opportunity is provided. Businesses using tax audit compliance (https://www.patronaccounting.com/tax-audit) support should integrate R&D approval tracking into their compliance calendar.
5. Maintain separate books and get them audited. The company must maintain separate books of account for each approved R&D facility and get them audited annually by a CA as defined under Section 515(3)(b).
6. File audit report in Form 13. Furnish Form 13 electronically to the Secretary, DSIR on or before the due date for filing the income tax return under Section 263(1)(c).
7. DSIR files Form 12 with CCIT. DSIR electronically furnishes Form 12 (Part A for approval, Part B for expenditure quantification) to the jurisdictional Chief Commissioner within 120 days of approval or audit report submission.

For Sponsored Research (Rule 30):

1. Identify the approved research entity. The research must be conducted by a National Laboratory, University, IIT, or specified person approved by the prescribed authority (Principal Scientific Adviser or Pr. CCIT Exemptions, depending on the sub-section).
2. Get the programme approved. The research programme must be approved by the prescribed authority. Applications are processed within two months, with a hearing before rejection.
3. Maintain separate accounts. The research entity must maintain separate accounts for each approved programme, audited annually by a CA.
4. Submit progress report in Form 10. Within three months of approval, furnish Form 10 showing progress and expenditure to the jurisdictional Chief Commissioner.
5. Issue receipts in Form 9. The research entity issues receipts to the sponsoring company in Form 9.
6. File completion certificate. On completion, submit a joint completion certificate with research findings and audited accounts within six months.

Documents and Records Needed for R&D Deduction Claims

• Form 11: Application for approval of in-house R&D facility
• Form 12: DSIR report (Part A - approval; Part B - expenditure quantification)
• Form 13: Annual audit report of in-house R&D facility
• Form 14: Approval order from prescribed authority
• Agreement with DSIR for cooperation in R&D
• Separate books of account for each approved facility
• Audited financial statements reflecting R&D expenditure in schedules/notes
• Form 9: Receipt for sponsored research payments (Rule 30)
• Form 10: Progress report for sponsored research programme
• Completion certificate with research findings (Rule 30)
• Salary records, material purchase invoices, and capital asset registers for R&D
• Copy of income tax return with R&D deduction claimed

Deduction Categories: In-House R&D vs Sponsored Research

Note: The 100% deduction rate applies to eligible expenditure from 1 April 2026 onwards. The earlier weighted deduction of 150% (available under Section 35(2AB) until March 2020) is no longer available. Companies planning R&D investments should factor the 100% rate into their tax projections.

Common Mistakes to Avoid in R&D Deduction Claims

Mistake 1: Claiming deductions for excluded activities. Rule 29(2)(d)(i) explicitly excludes market research, sales promotion, quality control, testing, commercial production, style changes, and routine data collection from the definition of eligible scientific research. Many companies incorrectly include quality testing or product improvement costs in their R&D claims.

Mistake 2: Not maintaining separate books for the R&D facility. Rule 29 requires separate books of account for each approved facility, audited annually. Commingling R&D expenses with general business expenses makes the deduction indefensible during assessment. For structuring compliant entities, refer to guidance on company registration (https://www.patronaccounting.com/private-limited-company-registration) to ensure the corporate structure supports R&D segregation.

Mistake 3: Missing the Form 13 filing deadline. The audit report in Form 13 must be furnished to DSIR on or before the due date for filing the income tax return under Section 263(1)(c). Late filing can result in DSIR not furnishing Form 12 to the Chief Commissioner, effectively blocking the deduction.

Mistake 4: Disposing of R&D assets without approval. Assets acquired by the approved facility must not be disposed of without the approval of the Secretary, DSIR. Unauthorised disposal can trigger withdrawal of approval and denial of deductions for the relevant year.

Mistake 5: Not reflecting R&D expenditure in audited financial statements. Rule 29(2)(d)(vii) requires that capital and revenue expenditure on the in-house R&D facility be separately reflected in the schedules or notes to accounts in the company’s audited financial statements. Missing this disclosure creates a disconnect between the R&D claim and the published accounts.

Consequences of Non-Compliance with Rules 29 and 30

There is no specific penalty section for R&D deduction non-compliance. However, the consequences are substantive:

If a company fails to obtain DSIR approval, maintain separate books, or file the required forms (11, 12, 13), the deduction under Section 45(2) is simply denied. The Assessing Officer will disallow the claimed deduction during assessment, resulting in additional tax liability plus interest under Section 234B/234C.

Under Rule 30, if the sponsored research entity fails to maintain separate accounts, submit Form 10, or furnish the completion certificate, the prescribed authority may revoke the programme approval. This revocation affects the sponsor’s deduction retroactively for the relevant tax year.

Additionally, if DSIR finds that the in-house facility has ceased genuine R&D activities or is conducting excluded activities (market research, quality testing, etc.), the approval can be withdrawn. Any deductions claimed post-withdrawal are disallowed, and the company may face reassessment for prior years if the withdrawal is backdated.

How R&D Deductions Connect with Other Provisions

The scientific research deduction under Section 45 interacts with several other provisions of the Income Tax Act, 2025. Section 33 (depreciation) is explicitly linked-if a deduction is claimed under Section 45 for capital expenditure on an asset, no separate depreciation deduction is allowed under Section 33(3) for the same asset. This prevents double-dipping on the same R&D capital investment.

Section 45(3)(c) deductions for sponsored research interact with Rule 30’s audit and reporting requirements. The research entity must issue Form 9 receipts to the sponsor, and DSIR furnishes Form 12 to the Chief Commissioner. If either link in this chain breaks-missing receipt, missing DSIR report, or missing audit-the sponsor loses the deduction even though the payment was made in good faith.

For companies undergoing amalgamation, Section 45(10) provides continuity-R&D assets transferred from the amalgamating company to the amalgamated company (being an Indian company) continue to qualify for deductions as if the transfer had not occurred. This is important for M&A transactions involving R&D-heavy companies in pharma, biotech, and electronics sectors.

What Do Rules 29 and 30 Cover? Key Differences

Key Takeaways

Rules 29 and 30 of the Draft Income Tax Rules, 2026 prescribe the approval process, prescribed authorities, forms, and compliance conditions for claiming scientific research deductions under Section 45 of the Income Tax Act, 2025, effective from 1 April 2026.

Rule 29 governs in-house R&D deductions-requiring DSIR approval via Form 11, separate books audited in Form 13, and DSIR reporting in Form 12 to the Chief Commissioner. Only genuine scientific research qualifies; market research, quality control, and routine testing are explicitly excluded.

Rule 30 governs sponsored research programmes-requiring prescribed authority approval, separate accounts, progress reports in Form 10, receipts in Form 9, and completion certificates with research findings within six months.

The deduction rate is 100% of eligible expenditure (down from the earlier 150% weighted deduction under old Section 35(2AB) which was available until March 2020). Companies should factor this into R&D investment planning.

Non-compliance does not attract a specific penalty but results in denial of the deduction, potential reassessment, and withdrawal of DSIR approval-making procedural compliance as important as the substantive R&D investment itself.

Need Help with R&D Deduction Compliance?

Claiming scientific research deductions under Rules 29 and 30 requires careful coordination between DSIR approval, separate book-keeping, annual audits, and electronic form filing. The procedural requirements are as critical as the R&D investment itself-missing a single form or deadline can result in complete denial of the deduction.

Explore our income tax filing and compliance (https://www.patronaccounting.com/income-tax-return) services for expert guidance on R&D deduction claims, DSIR coordination, and Form 11/12/13 filing under the new Act.

For queries, reach out at +91 945 945 6700 or WhatsApp us directly.