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

ICDS I and ICDS IX: Accounting Policies and Borrowing Costs

Updated 11 October 2026 · Fact-checked

ICDS I sets the base rules for computing business income: going concern, consistency and accrual, disclosure of policies, and limits on changing them. ICDS IX requires borrowing costs directly attributable to a qualifying asset to be capitalised. Solve questions by classifying the borrowing, finding the period, computing the cost, and capitalising it without netting investment income.

Understand ICDS I and ICDS IX: Accounting Policies and Borrowing Costs

ICDS (Income Computation and Disclosure Standards) are standards notified by the Central Government for computing income. They apply to assessees who follow the mercantile system of accounting, for income chargeable under the heads Profits and gains of business or profession and Income from other sources. Your answers should use the term tax year (for example, tax year 2026-27). In your exam, a question usually tests how the tax treatment differs from the books.

ICDS I (Accounting Policies) starts with three fundamental accounting assumptions: going concern, consistency and accrual. Assume they are followed. If an assessee does not follow one, that fact must be disclosed. The standard also expects policies to be chosen so that profit or loss is computed fairly. A key tax point: mark to market loss or expected loss is not recognised unless another ICDS permits it. So the books' prudence-based provisions do not automatically become tax deductions.

All significant accounting policies must be disclosed. A policy can be changed only if the change is required by law or an ICDS, or if it results in a more appropriate presentation. A change with a material effect must be disclosed, with its impact where it can be worked out. Consistency is the reason: income of different years must be comparable.

ICDS IX (Borrowing Costs) deals with interest and similar costs on money borrowed. Borrowing costs include interest, commitment charges, amortised discount or premium, ancillary costs of arranging the loan and finance charges on leases. If they are directly attributable to acquiring, constructing or producing a qualifying asset, you capitalise them into the asset's cost. They are then recovered through depreciation, not deducted as interest. Other borrowing costs are treated as an ordinary expense.

A qualifying asset is:

land, building, machinery, plant or furniture (tangible assets);
know-how, patents, copyrights, trademarks, licences, franchises or similar business or commercial rights (intangible assets); or
inventories that need twelve months or more to reach saleable condition.

The 12-month test applies only to inventories. The listed tangible and intangible assets qualify without any time test. AS 16 uses a different wording for all assets: an asset that takes a 'substantial period' to get ready.

Capitalisation starts only when all three conditions are met: expenditure for the asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use have begun. It ends on the date the asset is first put to use. ICDS IX has no suspension of capitalisation during breaks in work.

Key rules to remember

Fundamental assumptions (ICDS I): Going concern + Consistency + Accrual; Assumed to be followed. Non-compliance must be disclosed.
Change in accounting policy (ICDS I): Change only if required by law/ICDS OR gives a more appropriate presentation; Material effect must be disclosed. Impact is disclosed where it can be ascertained.
Specific borrowing (ICDS IX): Amount capitalised = Actual borrowing cost incurred on the loan for the period of capitalisation; Do NOT deduct income earned on temporary investment of the unused loan.
General borrowing (ICDS IX): Amount capitalised = (A × B) ÷ C; A = average of cost of the qualifying asset on the first and last day of the previous year. B = actual cost of general borrowings during the year (excluding specific borrowings). C = average of total assets in the balance sheet on the first and last day of the previous year.
Qualifying asset test: Listed tangible and intangible assets: qualify, no time test. Inventories: 12 months or more to reach saleable condition; The 12-month test applies only to inventories.
Commencement: Expenditure being incurred + Borrowing costs being incurred + Activities to prepare the asset begun; All three conditions must be met before capitalisation starts.
Cessation: Capitalisation stops on the date the asset is first put to use; Borrowing cost after that date is a revenue expense.

How to solve ICDS I and ICDS IX: Accounting Policies and Borrowing Costs questions

Use this order for any ICDS I or ICDS IX question. It stops you from capitalising what you should expense, and the reverse.

1Read the facts and decide which ICDS applies: policy, consistency and disclosure point (ICDS I) or interest on a loan used for an asset (ICDS IX).
2For ICDS IX, check that the asset is a qualifying asset. Land, building, machinery, plant, furniture and the listed intangibles qualify without a time test. Apply the 12-month rule only to inventories. Confirm the loan is for acquisition, construction or production.
3Classify each loan as specific (taken for that asset) or general (taken for business and used partly for the asset).
4Fix the capitalisation period: start when expenditure for the asset is being incurred, borrowing costs are being incurred and activities to prepare the asset have begun. End on the date of first put to use.
5Compute the cost. For specific loans, use actual interest for the period, ignoring any investment income. For general loans, apply (A × B) ÷ C.
6Split the total interest into the part capitalised and the part claimed as business expense for the year. Add back any excess the books capitalised or expensed differently.
7For ICDS I, test any policy change against the two permitted reasons. Name the assumption and the disclosure needed.
8Close with a clear conclusion in one line, with the amount added to the asset cost and the amount allowed as deduction.

Quickest way: Three-check shortcut for borrowing cost questions

When to use it: Use it in the MCQ section or when a descriptive question gives all figures and asks only for the amount capitalised.

Check that the asset is a qualifying asset. If the asset is inventory, apply the 12-month rule. If inventory fails it, capitalisation is zero and the whole interest is expensed.
If the loan is specific, write actual interest for the capitalisation period. Do not subtract investment income.
If the loan is general, compute (A × B) ÷ C directly. Then deduct this from total general interest to get the revenue expense.

Common mistakes in ICDS I and ICDS IX: Accounting Policies and Borrowing Costs

Deducting income from temporary investment of the loan from the interest capitalised.
AS 16 and Ind AS 23 allow this netting, so students carry it over.
Fix: Under ICDS IX, capitalise the actual interest. Treat the investment income as income from other sources.
Stopping capitalisation when the asset is ready for use, or pausing it during delays.
Students mix the accounting-standard rule of 'ready for intended use' and suspension in long breaks with ICDS IX.
Fix: Stop on the date the asset is first put to use. Do not suspend for breaks in activity.
Capitalising interest on an asset that is not a qualifying asset, such as inventory ready in under 12 months.
Students treat every loan-financed asset as qualifying.
Fix: Apply the 12-month test to inventories before computing any amount.
Using the wrong values in the general borrowing formula, for example year-end cost instead of average, or including specific loans in B.
The formula has three averages and exclusions that are easy to confuse.
Fix: Write A, B and C with labels. Use averages of opening and closing figures and keep specific borrowings out of B.
Thinking an assessee can change an accounting policy freely, or that prudence provisions are always deductible.
Books-based thinking is applied to a tax computation.
Fix: A change needs a legal requirement or a more appropriate presentation, with disclosure. Mark to market and expected losses are not recognised unless another ICDS allows.

Worked examples

Example 1

Mehta Infra Ltd borrowed ₹2,00,00,000 at 10% p.a. on 1 April 2026 specifically to construct a factory that takes over 18 months to complete. Because work started slowly, it earned ₹3,00,000 from temporarily investing part of the loan during 2026-27. The factory was not put to use by 31 March 2027. Find the interest capitalised for the tax year 2026-27 under ICDS IX and the difference from AS 16.

Show the solution

The factory is a tangible asset (building), so it is a qualifying asset. The loan is a specific borrowing.
Interest for the year = ₹2,00,00,000 × 10% = ₹20,00,000.
Under ICDS IX, income from temporary investment is not deducted. Capitalised amount = ₹20,00,000.
The ₹3,00,000 investment income is taxed separately as income from other sources.
Under AS 16, interest capitalised would be ₹20,00,000 − ₹3,00,000 = ₹17,00,000. The difference is ₹3,00,000.

Answer: ₹20,00,000 is capitalised under ICDS IX. AS 16 would capitalise ₹17,00,000. The ₹3,00,000 is separately taxable as income from other sources.

Example 2

Kaveri Textiles Ltd is building a plant that takes more than a year to complete. It did not take any specific loan for it. For the tax year 2026-27, the balance sheet figures are: cost of the plant under construction ₹4,00,00,000 on 1 April 2026 and ₹8,00,00,000 on 31 March 2027; total assets ₹40,00,00,000 on 1 April 2026 and ₹60,00,00,000 on 31 March 2027. Interest on general borrowings for the year was ₹30,00,000. Compute the interest to be capitalised and the amount allowed as revenue expense.

Show the solution

The plant is a qualifying asset funded from general borrowings, so the formula (A × B) ÷ C applies.
A is the average of the cost of the plant on the first and last day of the year. A = (₹4,00,00,000 + ₹8,00,00,000) ÷ 2 = ₹6,00,00,000.
B = ₹30,00,000, the actual cost of general borrowings for the year.
C is the average of total assets on the first and last day of the year. C = (₹40,00,00,000 + ₹60,00,00,000) ÷ 2 = ₹50,00,00,000.
Capitalised = ₹6,00,00,000 × ₹30,00,000 ÷ ₹50,00,00,000 = ₹3,60,000.
Revenue expense = ₹30,00,000 − ₹3,60,000 = ₹26,40,000.

Answer: ₹3,60,000 is capitalised to the plant. ₹26,40,000 is treated as interest expense for the year, subject to the other conditions for deduction.

Exam tips

In MCQs, the usual traps are the 12-month rule, not netting investment income, and cessation on first put to use. Check these three first.
For comparison questions with AS 16, write the difference point by point: qualifying asset test, investment income, cessation and suspension.
Show A, B and C separately in the general borrowing formula. Even if the final number is wrong, you keep method marks.
For ICDS I, name the fundamental assumption or the permitted reason for change. Then state the disclosure required.
End every numerical answer with the split between capitalised amount and revenue expense. This is the decision the examiner wants.

Practice questions from Income Computation and Disclosure Standards (ICDS)

ICDS I and ICDS IX: Accounting Policies and Borrowing Costs: frequently asked questions

What are the fundamental accounting assumptions under ICDS I?

They are going concern, consistency and accrual. They are assumed to be followed in computing income. If an assessee does not follow one of them, the fact must be disclosed.

When can an accounting policy be changed under ICDS I?

Only if the change is required by law or an ICDS, or if it gives a more appropriate presentation of the income. A change with a material effect must be disclosed, with its impact where it can be ascertained.

How does ICDS IX differ from AS 16?

ICDS IX applies a 12-month test only to inventories, while AS 16 uses 'substantial period' for all assets. ICDS IX does not deduct income from temporary investment of specific loans, stops capitalisation on the date the asset is first put to use and has no suspension during breaks. It also gives a formula for general borrowings.

How do I compute capitalisation for general borrowings?

Use (A × B) ÷ C. A is the average cost of the qualifying asset, B is the actual cost of general borrowings, and C is the average of total assets, using opening and closing figures of the previous year. The balance of interest is a revenue expense.