Direct Tax Laws and International Taxation · Income Computation and Disclosure Standards (ICDS)

ICDS Framework and Method of Accounting under Income-tax Act, 2025

Updated 11 October 2026 · Fact-checked

ICDS are income computation and disclosure standards notified by the Central Government under section 276(2). Business and other-sources income is computed on the cash or mercantile system regularly followed by you, subject to notified ICDS. If accounts are doubtful, the method is not regular, or ICDS is ignored, the Assessing Officer can assess under section 271.

Understand ICDS Framework and Method of Accounting

Your books are prepared under accounting standards (Ind AS or AS) to show a true and fair view for owners and regulators. Tax law has a different aim: it wants a uniform, predictable way to compute taxable income. ICDS bridge that gap.

The legal basis is section 276 of the Income-tax Act, 2025. Section 276(1) says income under "Profits and gains of business or profession" or "Income from other sources" is computed as per either the cash or mercantile system of accounting regularly employed by the assessee. This is subject to section 276(2).

Section 276(2) lets the Central Government notify income computation and disclosure standards for any class of assessees or for any class of income. So ICDS apply only to the class of assessee or income covered by the notification. They apply only to these two heads: business or profession, and other sources. They do not govern salary, house property or capital gains.

Section 276(3) is the enforcement rule. The Assessing Officer may assess in the manner of section 271 if (a) he is not satisfied about the correctness or completeness of the accounts, (b) the method of accounting has not been regularly followed, or (c) income has not been computed as per the notified standards.

ICDS versus accounting standards: accounting standards aim at fair presentation of financial statements; ICDS aim at computing taxable income. Where they differ, you follow ICDS for tax and keep a reconciliation. Other sections of the Act refer back to ICDS, for example section 277 (inventory valuation), section 57 (construction and service contracts) and section 43 (foreign exchange fluctuation).

Key rules to remember

Method of accounting: Business / other sources income = computed on cash OR mercantile system, regularly employed (s. 276(1)); Subject to notified ICDS. Consistency matters: the method must be regularly followed.
Power to notify ICDS: Central Government may notify ICDS for any class of assessees or any class of income (s. 276(2)); ICDS apply only where notified, and only for these two heads.
Grounds for assessment under section 271: (a) accounts incorrect or incomplete; (b) method not regularly followed; (c) income not computed as per notified standards (s. 276(3)); Any one ground is enough. Learn them as A-B-C.
Inventory valuation (s. 277(1)(i)): Inventory = lower of actual cost or net realisable value, as per ICDS; Cost includes tax, duty, cess or fee actually paid or incurred to bring goods to location and condition (s. 277(1)(ii)).
Securities as inventory: Unlisted, or listed but not regularly quoted: actual cost initially recognised. Other securities: lower of cost or NRV (s. 277(1)(iii),(iv)); Comparison of cost and NRV is category-wise (s. 277(3)).
Contracts (s. 57): Construction contracts and service contracts: percentage of completion method; services of not more than 90 days: project completion; indeterminate acts over a period: straight line; Contract revenue includes retention money; contract costs are not reduced by incidental interest, dividends or capital gains.

How to solve ICDS Framework and Method of Accounting questions

Use this method for any question on the ICDS framework or method of accounting.

1Identify the head of income. ICDS and the cash or mercantile rule apply to business or profession and other sources only.
2Find which method the assessee regularly follows, cash or mercantile. Note whether it has been changed.
3Check whether an ICDS is notified for this class of assessee or income, and which standard covers the item.
4Where books and ICDS differ, compute income as per ICDS and note the adjustment against book profit.
5Test the section 276(3) grounds: accounts unreliable, method not regular, or ICDS not followed.
6State the consequence: assessment under section 271 if any ground is met.
7Close with a clear conclusion and quote the section number.

Quickest way: Three-question check

When to use it: For MCQs and short case-based questions where you have under two minutes.

Which head? If not business or other sources, ICDS is out.
Which method is regular, cash or mercantile? Consistency is the key.
Does anything breach section 276(3)(a), (b) or (c)? If yes, answer: assessment under section 271.

Common mistakes in ICDS Framework and Method of Accounting

Applying ICDS to salary, house property or capital gains.
Students treat ICDS as a general tax-computation standard.
Fix: Remember that section 276(1) covers only business or profession and other sources.
Saying an assessee may freely switch between cash and mercantile every year.
The word 'either' is read as a free choice each year.
Fix: The method must be regularly employed. Irregular following is a ground under section 276(3)(b).
Treating ICDS as the same as Ind AS or AS.
Both deal with revenue, inventory and so on.
Fix: Accounting standards drive financial statements; ICDS drive taxable income. Tax computation follows ICDS where notified.
Assuming ICDS apply to every assessee automatically.
Ignoring the word 'notified' in section 276(2).
Fix: ICDS apply to the class of assessees or income covered by the notification.
Quoting the old Income-tax Act, 1961 section numbers.
Older study notes use section 145.
Fix: For June 2027, cite section 276 of the Income-tax Act, 2025, and use 'tax year'.
Stating that all three section 276(3) conditions must be met together.
Misreading the list.
Fix: The conditions are alternatives, joined by 'or'. One is enough.

Worked examples

Example 1

Sharma Traders, Pune, has followed the mercantile system for years. In tax year 2026-27 it computed business income on cash basis for some items to defer tax, and computed inventory ignoring the notified standards. Can the Assessing Officer reject its computation?

Show the solution

The income is from business, so section 276(1) applies: method must be cash or mercantile, regularly employed.
Sharma Traders has mixed cash treatment into a mercantile system, so the method has not been regularly followed. This meets section 276(3)(b).
Inventory was valued ignoring notified standards. Section 277(1)(i) requires lower of actual cost or net realisable value as per ICDS. This meets section 276(3)(c).
Either ground is enough, as the conditions are alternatives.

Answer: Yes. The Assessing Officer may make an assessment in the manner provided in section 271 because the method was not regularly followed (section 276(3)(b)) and income was not computed as per notified standards (section 276(3)(c)).

Example 2

Choose the correct statement: (A) ICDS apply to all five heads of income. (B) ICDS are notified by the Central Government under section 276(2) and apply to business or profession and other sources income. (C) ICDS are issued by ICAI and replace Ind AS. (D) ICDS apply only to companies.

Show the solution

Option A is wrong: section 276(1) restricts the framework to business or profession and other sources.
Option C is wrong: ICDS are notified by the Central Government, not issued by ICAI, and they do not replace Ind AS, which continue for financial reporting.
Option D is wrong: section 276(2) refers to any class of assessees, not only companies.
Option B matches section 276(1) and (2).

Answer: Option B.

Exam tips

Quote section 276(1), (2) and (3) by sub-section; examiners reward exact references.
Learn the three section 276(3) grounds as alternatives and apply them to the case facts.
In MCQs, watch for traps such as 'all heads of income' or 'issued by ICAI'.
When asked to differentiate ICDS and accounting standards, give purpose, issuing authority, scope of heads and the effect of conflict.
Link the framework to section 277 and section 57 when a question mixes inventory or contracts.

Practice questions from Income Computation and Disclosure Standards (ICDS)

ICDS Framework and Method of Accounting: frequently asked questions

Which section of the Income-tax Act, 2025 deals with the method of accounting?

Section 276. It requires business and other-sources income to be computed on the cash or mercantile system regularly employed, subject to notified ICDS. It also lists when the Assessing Officer may assess under section 271.

What is the difference between ICDS and accounting standards?

Accounting standards govern how financial statements present a true and fair view. ICDS are notified by the Central Government for computing taxable income from business or profession and other sources. Where they differ, you compute taxable income as per ICDS.

Who must follow ICDS?

ICDS apply to the class of assessees or class of income covered by the Central Government's notification under section 276(2). They operate for income under business or profession and income from other sources.

Can an assessee choose between cash and mercantile systems?

Yes, either system may be employed, but it must be regularly followed. If the method is not regularly followed, the Assessing Officer can assess under section 271 as per section 276(3)(b).