Ind AS 38 vs Section 35(2AB): Reconciling Book vs Tax R&D Treatment

An illustrative Tier-2 biosimilars formulator running a Bangalore DSIR-approved in-house R&D facility closes its books for FY 2026-27 on an active biosimilars development pipeline — an anti-VEGF biosimilar in Phase 3 pivotal trials and regulatory filing preparation is illustrative of the scale. Total R&D expenditure for the year sits at the order of Rs 320 crore. Under Ind AS 38 — Intangible Assets, the year’s spend must be split at the six-condition test boundary between research-phase expenditure (expensed as incurred) and development-phase expenditure (capitalised on the balance sheet as an internally-generated intangible asset). Under Section 35(2AB) of the Income Tax Act 2025, the entire eligible revenue R&D expenditure incurred at the DSIR-approved facility qualifies for a 100 percent weighted deduction on the tax return — irrespective of the book treatment. The consequence is a book-tax gap in the year of expenditure that creates a deferred tax movement under Ind AS 12 and unwinds over the amortisation life of the capitalised intangible asset. This is Ind AS 38 R&D capitalisation Section 35(2AB) pharma book tax reconciliation at operating scale — the discipline of holding the book capitalisation register, the Section 35(2AB) eligibility register, and the Ind AS 12 deferred tax bridge in a single per-project workbook so that the year-end audit trail, the Form 3CL certification, the intangible-asset note and the deferred-tax note all trace to the same source ledger.

Quick reference

The reconciliation in one paragraph

A pharma company running an active biosimilars or new chemical entity development programme incurs R&D expenditure that must be treated two ways in parallel. For financial reporting under Ind AS 38, research-phase expenditure — pre-clinical work, target validation, Phase 1 safety trials — is expensed in the P&L as incurred. Development-phase expenditure — Phase 2 and Phase 3 trials, comparability studies, process scale-up, regulatory filing preparation — is capitalised on the balance sheet as an internally-generated intangible asset once the six-condition test in Ind AS 38 is met in full. For direct tax under Section 35(2AB) of the Income Tax Act 2025, the entire eligible revenue R&D expenditure incurred at the DSIR-approved in-house facility qualifies for a 100 percent weighted deduction, irrespective of the Ind AS 38 book treatment. In the year of development-phase capitalisation, the books hold the expenditure as an asset (no P&L expense) while the tax return revenue-expenses the same amount. This is a book-tax temporary difference under Ind AS 12 — Income Taxes, which recognises a deferred tax movement at the enacted or substantively enacted effective tax rate. The gap unwinds over the amortisation life of the capitalised asset once the product launches. The reconciliation surface is a per-project R&D cost centre workbook that runs three parallel registers — book capitalisation, Section 35(2AB) eligibility, and Ind AS 12 deferred tax bridge — from a single source expenditure ledger. See the Section 35(2AB) weighted deduction pharma R&D reconciliation guide for the wider mechanic anchor.

What the scenario looks like in India

The Indian pharma R&D-intensive segment concentrates in a small number of players with dedicated DSIR-approved in-house R&D facilities running active new chemical entity, biosimilars, or complex generics development pipelines. On the biosimilars axis, Biocon Biologics runs a large biosimilars pipeline out of its Bangalore campus with a portfolio spanning oncology, immunology, and ophthalmology therapeutic areas. Dr Reddy’s Laboratories runs new chemical entity and biosimilars R&D out of its Bollaram (Hyderabad) research centre. Sun Pharma runs the Sun Pharma Advanced Research Company (SPARC) programme for new chemical entities and specialty formulations. Zydus Lifesciences operates the Zydus Research Centre out of Ahmedabad for new chemical entities and biosimilars. Torrent Pharmaceuticals runs new chemical entity research out of its Ahmedabad-Baddi network. Alkem Laboratories runs R&D out of Baddi and Mumbai. On the CDMO/CRAMS axis, Suven Life Sciences, Neuland Laboratories, Piramal Pharma, Laurus Labs and Divi’s Laboratories run contract-research-heavy programmes with distinct R&D cost centre treatment. Syngene International — the Biocon subsidiary — runs discovery and development services for external clients, again with a distinctive Section 35(2AB) treatment because the contract-research fee model interacts with the DSIR eligibility framework differently from an in-house programme.

For the reconciliation this article walks through, the reference persona is a Tier-2 biosimilars developer with an annual R&D spend of the order of Rs 320 crore concentrated at a single DSIR-approved Bangalore facility, with an active biosimilars development pipeline that includes at least one asset in Phase 3 pivotal trials and regulatory filing preparation. The finance team’s design objective is a per-project workbook that carries the Ind AS 38 book capitalisation and the Section 35(2AB) tax deduction in parallel, feeds the annual report disclosures under Ind AS 38 (intangible asset addition and amortisation) and Ind AS 12 (deferred tax movement and effective-tax-rate reconciliation), and traces to the DSIR-empanelled CA’s Form 3CL year-end certification base without a reconciliation gap.

The regulatory overlay — Ind AS 38, Ind AS 12, and Section 35(2AB) IT Act 2025

Three anchors govern the pharma R&D book-tax reconciliation cycle. Two are accounting standards notified under the Companies (Indian Accounting Standards) Rules 2015 as amended; one is a direct-tax provision under the Income Tax Act 2025.

Ind AS 38 — Intangible Assets is the book standard. It defines an intangible asset as an identifiable non-monetary asset without physical substance, and it requires that expenditure on an intangible item be recognised as an expense unless it forms part of the cost of an intangible asset that meets the recognition criteria. For internally generated intangible assets, Ind AS 38 draws a sharp line between the research phase and the development phase. Research-phase expenditure is always expensed as incurred, on the reasoning that at the research stage the entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Development-phase expenditure is capitalised only when the entity can demonstrate all six of the following: technical feasibility of completing the intangible asset so it will be available for use or sale; the entity’s intention to complete the asset and use or sell it; the entity’s ability to use or sell the asset; how the asset will generate probable future economic benefits, including the existence of a market for the output or the asset itself; the availability of adequate technical, financial and other resources to complete the development; and the ability to measure reliably the expenditure attributable to the asset during its development. All six conditions must be met simultaneously. In practice, most Indian pharma R&D teams capitalise development-phase expenditure from the point of Phase 2 entry (for a new chemical entity) or the point of a successful comparability-study milestone (for a biosimilar), with an internal governance memo documenting the six-condition test evidence per project.

Section 35(2AB) of the Income Tax Act 2025 (formerly Section 35(2AB) of the Income Tax Act 1961 and preserved in substance through the 2025 recodification) permits a 100 percent weighted deduction of revenue R&D expenditure incurred at a DSIR-approved in-house R&D facility, where the assessee is engaged in the business of biotechnology or in any business of manufacture or production of an article or thing. The deduction rate was 150 percent until FY 2019-20 and 200 percent until FY 2016-17; the current 100 percent quantum is the operative rate for FY 2025-26 and forward. The deduction operates on revenue expenditure only — capital expenditure sits under Section 35(1)(iv) which allows 100 percent capex deduction on scientific research at a separate track. The eligibility framework is administered by the Department of Scientific and Industrial Research (DSIR) under the Ministry of Science and Technology. The DSIR issues Form 3CM approval of the in-house R&D facility on an initial three-year renewal cycle; the DSIR-empanelled Chartered Accountant certifies the year-end quantum of eligible expenditure in Form 3CL; and the Form 3CLA schedule is appended to the Return of Income linking the claim to the underlying Form 3CL certificate. The DSIR guidelines DSIR/Sec35(2AB)/1/2021 define the eligible expenditure categories (staff salaries, consumables, internal clinical trial costs, patent costs, DSIR-listed items) and the non-eligible categories (land and buildings, civil engineering, non-listed plant and machinery, market research, non-linked outsourced testing). Read the DSIR Form 3CL and 3CLA R&D approval reconciliation walkthrough for the DSIR filing cycle in detail.

Ind AS 12 — Income Taxes is the standard that bridges the two treatments. Ind AS 12 requires that a deferred tax asset be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the difference can be utilised, and that a deferred tax liability be recognised for all taxable temporary differences. A temporary difference arises whenever the carrying amount of an asset (or liability) in the financial statements differs from its tax base. When development-phase R&D expenditure is capitalised on the balance sheet under Ind AS 38 (carrying amount equal to the capitalised cost) but revenue-expensed on the tax return under Section 35(2AB) (tax base of zero — the expenditure has already been deducted), the carrying amount exceeds the tax base and a taxable temporary difference arises. Under Ind AS 12 the correct posting is a deferred tax liability. In practical annual report disclosure this typically appears as a movement in the deferred tax liability line in the year of capitalisation, offset by an equivalent movement in a deductible temporary difference on the intangible asset amortisation in future years. The measurement uses the tax rate enacted or substantively enacted at the reporting date.

A worked example — an illustrative biosimilars persona at year-end FY 2026-27

Illustrative — the following figures represent the operating pattern of a Tier-2 biosimilars formulator running an active biosimilars R&D programme at a Bangalore DSIR-approved facility. Public disclosures do not reveal per-project book-tax reconciliation quantum at this granularity; cross-verify against your own R&D cost centre extract and the DSIR-empanelled CA’s Form 3CL certification base before action.

The persona closes FY 2026-27 with total R&D expenditure at the Bangalore DSIR-approved facility of Rs 320 crore. The R&D cost centre extract splits by project and by development phase as follows:

For Section 35(2AB) eligibility, the R&D cost centre is further classified by DSIR-eligible category. Assume the full Rs 320 crore falls within eligible categories (scientific research staff salaries, consumables, internal clinical trial costs, patent filing costs, DSIR-listed items) — that is, the persona has already excluded land, buildings, non-listed plant and machinery, market research and non-linked outsourced testing at source. The Form 3CL certification quantum is therefore Rs 320 crore. The Form 3CLA schedule of the Return of Income claims a 100 percent revenue-expenditure deduction of Rs 320 crore against taxable profits.

For Ind AS 38 book treatment, Rs 145 crore is expensed in the P&L as research-phase spend. Rs 175 crore is capitalised on the balance sheet as an internally-generated intangible asset in development — an addition to the “Intangible assets under development” note. Amortisation has not yet commenced because none of the assets is yet available for use.

The book-tax temporary difference for FY 2026-27 is the Rs 175 crore capitalised amount whose tax base is zero (the entire amount has already been deducted on the tax return). At an illustrative MAT-adjusted effective tax rate of 25.17 percent (the Section 115BAA rate including surcharge and cess for a company that has opted into the concessional regime), the deferred tax movement is Rs 175 crore × 25.17 percent = Rs 44.05 crore. Under Ind AS 12 this is posted as a deferred tax liability increase in the year of capitalisation. The Ind AS 12 note in the annual report shows the movement as a distinct line under “Deferred tax on internally generated intangible assets — R&D capitalisation”. The effective tax rate reconciliation walks from the statutory rate to the effective rate and identifies “R&D expenditure capitalised for books but deducted for tax under Section 35(2AB)” as a reconciling item that reduces the effective rate below the statutory rate in the year of capitalisation.

In future years, as the capitalised intangible assets are commercialised and amortisation begins, the temporary difference will unwind. Assume the anti-VEGF biosimilar launches in FY 2028-29 with a ten-year commercial useful life. The Rs 118 crore capitalised on that asset amortises at Rs 11.8 crore per year in the P&L for ten years, without a corresponding tax deduction. The deferred tax liability recognised at capitalisation reverses at Rs 11.8 crore × 25.17 percent = Rs 2.97 crore per year for ten years. The effective tax rate reconciliation in those years will show the same line, now moving in the opposite direction, as the temporary difference unwinds.

Common reconciliation breakages

Four breakages recur across Indian pharma finance teams building the Ind AS 38 versus Section 35(2AB) reconciliation, and each maps to a specific control failure that either fails the year-end audit or misstates the deferred tax note.

• Capitalisation trigger date undocumented per project. The Ind AS 38 six-condition test must be met at a specific point in the project timeline, and the capitalisation trigger date is the date from which subsequent development-phase spend goes on the balance sheet rather than through the P&L. Finance teams that apply a blanket “Phase 2 entry” rule without a per-project governance memo documenting the six-condition evidence at that date invite an audit qualification. Reconciliation discipline: every capitalised project carries a governance-memo reference in the R&D cost centre workbook, with a signed R&D committee approval and the six-condition test evidence attached.

• DSIR-eligibility classification bleeds into non-eligible categories. The Section 35(2AB) claim is limited to eligible revenue expenditure at the DSIR-approved facility. Claims that include land, buildings, non-listed plant and machinery, market research, or testing performed outside the DSIR facility (without Form 3CL-certified linkage) fail the DSIR-empanelled CA’s certification and reduce the Form 3CL quantum below the claimed amount. Reconciliation discipline: the R&D cost centre general ledger splits at the sub-ledger level between DSIR-eligible and non-eligible categories, so the year-end Form 3CL certification quantum aligns with the audited R&D cost register without a reconciling item. See the clinical trial CRO expenditure Section 35(2AB) eligibility sibling for the outsourced-work eligibility mechanic.

• Deferred tax posted at the wrong effective rate. Under Ind AS 12 the deferred tax measurement uses the tax rate enacted or substantively enacted at the reporting date. Finance teams that post at the general 30 percent rate for a company that has opted into Section 115BAA at 25.17 percent (or vice versa) misstate the deferred tax movement and the effective-tax-rate reconciliation. Reconciliation discipline: the Ind AS 12 workbook explicitly captures the effective tax rate applicable at the reporting date, with the rate justification anchored to the return-of-income filing status and the concessional-regime election status.

• Intangible asset amortisation schedule not linked to deferred tax unwind schedule. The book capitalisation of Rs 175 crore in the development-phase year creates a deferred tax movement that must unwind proportionally over the amortisation life of the asset. Finance teams that maintain the intangible-asset amortisation schedule (owned by fixed-asset accounting) separately from the deferred-tax unwind schedule (owned by tax accounting) risk a mismatch in future years — the effective tax rate reconciliation will show line items that no longer reconcile to a per-project source. Reconciliation discipline: the Ind AS 12 workbook holds the deferred-tax unwind schedule per project, alongside the Ind AS 38 amortisation schedule per project, with both drawing from the same source capitalisation ledger.

How a reconciliation platform handles this

A purpose-built pharma reconciliation platform ingests the R&D cost centre general ledger with per-project sub-ledger split, applies the Ind AS 38 six-condition test governance workflow to identify the capitalisation trigger date per project, classifies each expenditure line by DSIR-eligibility category, and produces the three parallel registers (book capitalisation, Section 35(2AB) eligibility, Ind AS 12 deferred tax bridge) from a single source ledger. The Form 3CL year-end quantum, the Ind AS 38 intangible asset addition, and the Ind AS 12 deferred tax movement all trace to the same per-project workbook without a reconciling item. Match rate improvement of 51 to 88 percent on the R&D cost centre to project-master reconciliation, combined with an ISO 27001:2022 posture and DPDP Act 2023 aligned data handling, is what makes the platform an infrastructure investment for a Tier-2 biosimilars developer running an active R&D pipeline rather than a spreadsheet substitute. Read the Pharma reconciliation software India commercial pillar for the platform surface.

Cross-cluster bridges and where to read next

The Ind AS 38 versus Section 35(2AB) reconciliation documented here is one leg of the wider Theme 6 pharma R&D reconciliation surface. The Section 35(2AB) weighted deduction pharma R&D reconciliation guide Wave A cornerstone is the primary anchor for the Section 35(2AB) mechanic and the DSIR filing framework. The DSIR Form 3CL and 3CLA R&D approval reconciliation sibling walks the year-end certification workflow and the return-of-income schedule preparation in detail. The clinical trial CRO expenditure Section 35(2AB) eligibility sibling addresses the outsourced-work eligibility question that arises for biosimilars developers running Phase 3 trials through contract research organisations. For the wider inverted-duty reconciliation cycle that a pharma formulator runs in parallel with the R&D book-tax cycle, the Wave A cornerstone at Rule 89(5) for pharma formulations is the primary reference. The pharma cluster hub collects all sibling articles across the six pharma themes.

The methodology framework for building the per-project R&D book-tax reconciliation workbook — mapping every expenditure line to a Ind AS 38 classification and a Section 35(2AB) eligibility category, holding the deferred-tax bridge alongside the capitalisation register, and building the audit trail into the standing close process — sits in Terra Insight’s own reconciliation failure mode analysis design pillar and the reconciliation playbook for monthly close operations pillar. The broader authority for the platform is reconciliation software India.

The five FAQs below address the operational questions Indian pharma finance controllers and tax leads ask most often when building a standing Ind AS 38 versus Section 35(2AB) reconciliation for an active R&D pipeline.

Terra Insight Editorial Team Reconciliation Infrastructure

Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →

Published 15 July 2026

Domain expertise

TDS Reconciliation GST Input Credit Platform Settlements NACH Batch Matching Bank Reconciliation Form 26AS Matching ERP Integrations Enterprise Finance Ops

Reviewed by

NK

Navin Krishnan

Managing Director & Founder — Terra Insight

Ex Amazon India · Intuit QuickBooks · Tata nexarc

ISO 27001:2022 Patent Pending Incorporated 2024