Rule 40 of the Draft Income-tax Rules, 2026 prescribes conditions for skill development projects notified under section 47(1)(b). The company must maintain separate books of account for the notified project and have them audited by an accountant as defined under section 515(3)(b). The audit report must comment on the true and fair view of accounts, genuineness of activities, and compliance with statutory provisions and notification conditions.
Projects relating to existing employees are ineligible if training begins after six months of recruitment. Deductible expenses must be wholly and exclusively incurred for the eligible project and reduced by cost of land or building and any reimbursed or reimbursable expenditure. The company must furnish the audited project accounts, audit report, and deduction claimed to the Commissioner of Income-tax on or before the due date under section 263(1).
If the Commissioner finds failure to maintain or audit separate books, non-furnishing of documents, cessation of activities, non-genuine conduct, or violation of conditions, he must report to the Board for action under rule 39(14). Similarly, if NCVET doubts the genuineness of activities, it may recommend action.
The rule defines “eligible company” to include companies engaged in specified manufacturing (excluding items in the Thirteenth Schedule) or listed service sectors, and prescribes criteria for recognized training institutes affiliated to or certified by NCVET or State Councils.
Extract of Rule No. 40 of Draft Income-tax Rules, 2026
Rule 40
Conditions subject to which a skill development project is to be notified under Section 47(1)(b) of the Act
(1) The company undertaking a skill development project (hereinafter referred as ‘project’) shall maintain separate books of account for the project notified under Section 47(1)(b) and get such books of account audited by an accountant as defined in the Section 515(3)(b) of the Act.
(2) The audit report referred to in sub-rule (1) shall include the comments of the auditor on the true and fair view of the books of account maintained for the project, the genuineness of the activities of the project, and the fulfilment of the conditions specified in the relevant provisions of the Act, rules, or the conditions mentioned in the notification/s issued under rule 39.
(3) A project in respect of existing employees of the company shall not be eligible for notification under Section 47(1)(b) of the Act, where the training of such employees commences after six months of their recruitment.
(4) The expenses, eligible for deduction under Section 47(1)(b) of the Act, shall be all expenses incurred wholly and exclusively for undertaking an eligible project as reduced by
(a) the cost of any land or building;
(b) any expenditure on the project that is reimbursed or reimbursable to the assessee by any person, whether directly or indirectly.
(5) The company shall, on or before the due date of furnishing the return of income under section 263(1) of the Act, furnish the audited statement of accounts of the project for the tax year along with the audit report and the amount of deduction claimed under Section 47(1)(b) of the Act to the Commissioner of Income-tax.
(6) If it is found by the Commissioner of Income-tax that,—
(a) the company has not maintained separate books of account for the project or has not got such books of account audited by an accountant in accordance with sub-rule (1);
(b) the company has not furnished the documents referred to in sub-rule (5);
(c) the company has ceased to carry out activities of the project;
(d) the activities of the project of the company are not genuine; or
(e) the activities of the project of the company are not being carried out in accordance with the relevant provisions of the Act, rules, or the conditions subject to which the notification was issued,
he shall, after making appropriate inquiries, furnish a report on the circumstances referred to in clauses (a) to (e) to the Board for appropriate action under rule 39(14).
(7) If the NCVET is not satisfied about the genuineness of the activities of the notified project, it shall send its recommendation to the Board for appropriate action under rule 39(14).
(8) For the purposes of this rule and rule 39 –
(a)”Eligible company” means a company, which is-
(i) engaged in the business of manufacture or production of any article or thing, not being an article or thing mentioned at serial number 1 and serial number 2 of the list of articles or things specified in the Thirteenth Schedule; or
(ii) engaged in providing services mentioned below:
1. Accounting services
2. Architect services
3. Automobile repair or maintenance
4. Banking, insurance and financial services including ATM installation, maintenance and operations or banking correspondents or insurance agents
5. Beauty and cosmetology, including hair styling or manicurists or pedicurists
6. Cable operators or Direct To Home (DTH) services
7. Cargo Handling and stevedoring services
8. Construction including painting or woodwork or plumbing or flooring or electrical wiring or installation or maintenance of lifts
9. Courier services
10. Design services including fashion or gems and jewellery or apparel or industrial designing
11. Event management
12. Facilities management, housekeeping, cleaning services
13. Fire and safety services
14. Food processing or preservation services, including post harvesting and post farm-gate skills
15. Health and Wellness services including spa or nutritionists or weight management or health instructors or yoga or gym trainers
16. Home decor services, landscaping
17. Hospital and Healthcare services, such as Lab technicians, nursing and other paramedical staff
18. Hospitality, including culinary skills or catering services
19. Logistics and Transportation by any mode, including by air, sea, road, rail or pipelines, and related services such as driving or operation of heavy machinery equipment, forwarding agents, packers and movers
20. Market research services
21. Media or film or advertising
22. Mining and extraction of mineral resources, including hydrocarbons
23. Packaging and Warehousing, including both ambient temperature storage and cold storage, operation of Internal Container Depots and Container Freight Stations
24. Port and maritime services such as dredging, piloting, tug boat operations, shipbuilding, ship scrapping, bunkering
25. Power Sector Services, including those required for erection or installation or maintenance of equipment or towers, etc. in generation, transmission or distribution sector projects
26. Private Security, including guards, supervisors, installation and maintenance of security equipment etc.
27. Refrigeration and air-conditioning
28. Repair and maintenance services, including Installation and servicing of household goods or white goods
29. Retail marketing, including shop floor assistants or merchandisers
30. Telecom services, including erection and maintenance of towers
31. Travel and tourism, including guides or ticketing or sales or cab drives
(b)”Training institute” means a training institute,-
(i) set up by the Central Government or a State Government or a local authority;
(ii) affiliated to a State Council for Vocational Training;
(iii) affiliated to, or approved by, or empanelled by, the National Council for Vocational Education and Training;
(iv) affiliated to, or approved by, or empanelled by, the Central Government and certified by the National Council for Vocational Education and Training as having training standards equivalent to training institutes affiliated to the National Council for Vocational Education and Training; or
(v) affiliated to, or approved by or empanelled by, the State Government and certified by the National Council for Vocational Education and Training or a State Council for Vocational Training as having training standards equivalent to training institutes affiliated to the National Council for Vocational Education and Training or, as the case may be, the State Council for Vocational Training.
(c)” National Council for Vocational Education and Training ” means the Council constituted by the Ministry of Skill Development and Entrepreneurship vide Notification No. SD-17/113/2017-E&PW dated 05.12.2018
(d)” State Council for Vocational Training” means a State Council for Training in Vocational Trades established by the State Government.
