Taxation · Profits and Gains of Business or Profession

Special Deductions: Site Restoration Fund and Similar Provisions

Updated 4 October 2026 · Fact-checked

A site restoration fund deduction lets a business of prospecting for or producing petroleum or natural gas deduct deposits made for future site restoration. The deduction is the lower of the amount deposited by year end and 20% of business profits before this deduction. Withdrawals not used as the scheme allows become taxable business income.

Understand Special Deductions: Site Restoration Fund and Similar Provisions

Oil and gas companies must restore the site once extraction ends. This costs a lot, and it falls years after the income is earned. The law helps by giving a tax deduction when money is set aside for it. This is the site restoration fund deduction.

The deduction is in Schedule X of the Income-tax Act, 2025, and is allowed while computing business income. It is for an assessee who carries on a business of prospecting for, or extracting or producing, petroleum or natural gas or both in India, and who has an agreement with the Central Government for it. A trader in petroleum products does not qualify.

The assessee must put the money in one of two places. One is a special account with the State Bank of India under a scheme approved by the Ministry of Petroleum and Natural Gas. The other is the Site Restoration Account of that scheme. The deposit must be made before the end of the tax year. Depositing later, even before the due date of the return, does not count.

The deduction is a timing benefit, not a permanent exemption. You get the deduction when you deposit. If you later withdraw the money for the scheme's purpose, there is no further tax. If you withdraw it and use it for something else, or leave it misapplied, the amount is brought back to tax as business profit of that year. Because the deposit was already deducted, you cannot claim the same restoration spending again.

The deduction needs an audit. The accounts of the business must be audited by an accountant, and the audit report must be furnished with the return.

Key rules to remember

Deduction limit: Deduction = Lower of (A) amount deposited in the SBI special account / Site Restoration Account before the end of the tax year and (B) 20% × business profits before this deduction and before deductions under the chapter on deductions from gross total income; Profits mean profits computed under the head business income, so depreciation and other business allowances are already deducted. Check the exact base in the question.
Eligibility: Business of prospecting for / extracting / producing petroleum or natural gas or both in India + agreement with the Central Government; Both conditions must be met.
Timing of deposit: Deposit made on or before the last day of the tax year; A deposit after year end gives no deduction for that year.
Audit condition: Accounts audited by an accountant + audit report furnished with the return; Without these, the deduction is lost.
Withdrawal or misapplication: Amount withdrawn and not used for the scheme's purpose = deemed business profit of the year of withdrawal; Amount used for the scheme's purpose is not taxed again, and the same spending cannot be claimed as a deduction again.

How to solve Special Deductions: Site Restoration Fund and Similar Provisions questions

Use this order for any question on the site restoration fund. It covers both the deposit year and the withdrawal year.

1Check eligibility: is the business prospecting for, or extracting or producing, petroleum or natural gas in India under a Central Government agreement? If not, the deduction is nil.
2Check the deposit: was it made in the SBI special account or the Site Restoration Account before the end of the tax year? Ignore later deposits.
3Compute business profit before this deduction and before the deductions under the chapter on deductions from gross total income. Include depreciation and the usual allowances.
4Find 20% of that profit.
5Deduction = lower of the deposit and 20% of profit. Subtract it from business profit.
6Check the audit: the accounts must be audited and the report filed with the return. Say so in your answer.
7For a withdrawal, split the amount into the part used for the scheme's purpose and the part not so used. Add the latter to business profit of the year of withdrawal.
8Do not allow any separate deduction for the restoration spending paid out of the fund. State this in one line.

Quickest way: Lower-of-two plus withdrawal split

When to use it: Use this for MCQs and for short written parts where numbers are given and time is tight.

MCQ: compute 20% of the profit and compare with the deposit. Pick the smaller number. Check the deposit date first, because a late deposit gives nil.
MCQ on a withdrawal: only the amount not used for the scheme's purpose is taxable. Eliminate options that tax the whole withdrawal or none of it.
Written answer: use four labelled lines. Provision (Schedule X, eligibility), Facts (profit, deposit, date), Working (20% and the lower of the two), Conclusion (deduction and taxable income).
Write 'audit report to be furnished with the return' as a condition line to pick up easy step marks.
For withdrawals, show the split in a small two-line working so the examiner sees the taxable and non-taxable parts.

Common mistakes in Special Deductions: Site Restoration Fund and Similar Provisions

Allowing the full deposit as deduction without applying the 20% cap.
Students see 'deposit' and treat it like a donation or investment that is fully deductible.
Fix: Always compute 20% of profit and take the lower of the two. Write both figures in your working.
Computing 20% on profit after deducting the site restoration deduction or other deductions in the chapter on deductions from gross total income.
Students use total income or profit after all deductions out of habit.
Fix: Use business profit before this deduction and before the chapter deductions. The base is circular if you deduct first.
Allowing the deduction for a deposit made after the tax year ends but before the return due date.
Students mix this up with deductions where the timing is the due date of the return.
Fix: The deposit must be made by the last day of the tax year. A later deposit gives no deduction for that year.
Taxing the full withdrawal from the fund.
Students remember 'withdrawal is taxable' and stop there.
Fix: Tax only the part not used for the scheme's purpose. The part spent as the scheme allows is not added back.
Claiming the restoration expense again as a business deduction in the year it is paid out of the fund.
Students treat the deposit and the actual expense as two separate items.
Fix: The deposit already gave the deduction. Allow no second deduction for spending met out of the fund.
Applying the deduction to any petroleum business or any oil trader.
Students read 'petroleum' loosely.
Fix: Only prospecting, extraction or production of petroleum or natural gas in India, with a Central Government agreement, qualifies.

Worked examples

Example 1

A company carries on extraction of natural gas in India under an agreement with the Central Government. Its business profit for the tax year 2026-27, before any deduction for the site restoration fund and before deductions under the chapter on deductions from gross total income, is ₹80,00,000. On 28 March 2027 it deposited ₹18,00,000 in a special account with SBI under the approved scheme. Its accounts are audited and the report is filed. Compute the deduction and the business income.

Show the solution

Eligibility: extraction of natural gas in India under a Central Government agreement, so the company is eligible.
Deposit: ₹18,00,000 was deposited in the SBI special account before the end of the tax year, so it qualifies.
Limit: 20% × ₹80,00,000 = ₹16,00,000.
Deduction = lower of ₹18,00,000 and ₹16,00,000 = ₹16,00,000.
Business income = ₹80,00,000 − ₹16,00,000 = ₹64,00,000.
The excess deposit of ₹2,00,000 gets no deduction. The audit condition is met.

Answer: Deduction is ₹16,00,000 and business income is ₹64,00,000.

Example 2

In the next year, the same company withdraws ₹10,00,000 from its Site Restoration Account. It uses ₹7,00,000 on site restoration as the approved scheme permits. It uses ₹3,00,000 to meet general office expenses. Its other business profit for that year, before this item, is ₹50,00,000. Compute its business profit for that year.

Show the solution

Split the withdrawal: ₹7,00,000 used for the scheme's purpose and ₹3,00,000 not so used.
The ₹7,00,000 used as the scheme allows is not taxed again. The same spending is also not allowed as a separate deduction, because the deposit already gave the deduction.
The ₹3,00,000 not used for the scheme's purpose is deemed business profit of the year of withdrawal.
Business profit = ₹50,00,000 + ₹3,00,000 = ₹53,00,000.
The office expenses of ₹3,00,000 are an ordinary business expense and are dealt with under the usual rules for expenses. They are already reflected in the ₹50,00,000 profit in this question.

Answer: Business profit for the year is ₹53,00,000, which includes ₹3,00,000 deemed profit from the misapplied withdrawal.

Exam tips

In a numerical, show the lower-of-two working in one line: 'Deposit ₹__ vs 20% of ₹__ = ₹__; deduction ₹__'. This earns most of the marks.
Read the deposit date and the place of deposit in the question. These are the usual traps, and many questions hide a late or wrong-place deposit.
In theory questions, write conditions as a list: eligible business, Central Government agreement, SBI or Site Restoration Account, deposit by year end, audit report.
For withdrawals, always split the amount into used and not used for the scheme's purpose before concluding.
Use the 2025 Act terms 'tax year' and 'Schedule X'. If you are unsure of a serial number, write the rule without it.

Practice questions from Profits and Gains of Business or Profession

Special Deductions: Site Restoration Fund and Similar Provisions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Special Deductions: Site Restoration Fund and Similar Provisions: frequently asked questions

Who can claim the site restoration fund deduction?

An assessee carrying on a business of prospecting for, or extracting or producing, petroleum or natural gas or both in India, with a Central Government agreement. Other businesses cannot claim it. The accounts must also be audited and the report furnished.

What is the maximum deduction for deposits to the site restoration fund?

It is the lower of the amount deposited by the end of the tax year and 20% of business profits before this deduction and before the chapter deductions. Any deposit above the 20% limit gets no deduction in that year.

What happens if I withdraw money from the site restoration fund?

If the money is used for the scheme's purpose, it is not taxed again. If it is withdrawn and not used as the scheme allows, it is treated as business profit of the year of withdrawal. You also cannot claim a second deduction for restoration spending met from the fund.

Is this deduction a permanent tax saving?

No. It defers tax. The deduction is allowed on deposit, but misapplied or unused amounts are brought back to tax as business profit when they are withdrawn or wrongly used.