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

ICDS II and ICDS V: Valuation of Inventories and Tangible Fixed Assets

Updated 11 October 2026 · Fact-checked

ICDS II says inventory is valued at the lower of actual cost and net realisable value, with cost built from purchase, conversion and other costs to bring goods to their location and condition. Compute cost, compare it with NRV, then add taxes paid. Fixed assets are not stock: they earn depreciation under section 33.

Understand ICDS II and ICDS V: Valuation of Inventories and Tangible Fixed Assets

Inventory is the stock you hold for sale, or use in production, or consume as materials. Its value at year-end decides your closing stock, and closing stock directly changes business profit. A higher closing stock means a higher profit. So tax law fixes strict rules for valuing it.

The Income-tax Act, 2025 sets the base rule in section 277(1)(i): inventory is valued at the lower of actual cost or net realisable value (NRV), computed as per the ICDS notified under section 276(2). Cost includes purchase price and conversion costs, plus other costs needed to bring the goods to their present location and condition. NRV is the estimated selling price less the estimated costs to complete and to make the sale.

Section 277(1)(ii) adds that the valuation of purchases, sales and inventory must include any tax, duty, cess or fee (by whatever name called) actually paid or incurred to bring the goods or services to their location and condition on the valuation date. Section 277(4) says this covers such payments irrespective of any right arising from them. So you cannot leave such a duty out of cost just because you can claim a credit or set-off for it.

Securities held as inventory have separate rules. Under section 277(1)(iii), securities not listed, or listed but not quoted with regularity, are valued at actual cost initially recognised. Under clause (iv), other securities are valued at the lower of cost or NRV. Under section 277(3), the comparison of cost and NRV for securities is made category-wise. Scheduled banks and public financial institutions follow ICDS after taking RBI guidelines into account (section 277(2)).

Fixed assets are different. They are not stock for sale. They earn tax depreciation under section 33, which works on the actual cost to the assessee. Section 33(1) covers two groups of assets, owned wholly or partly by you and used wholly and exclusively for business:

  • Tangible assets: buildings, machinery, plant or furniture.
  • Intangible assets: know-how, patents, copyrights, trademarks, licences, franchises or similar business or commercial rights, acquired on or after 1 April 1998. Goodwill is not covered.

Depreciation is charged on the written down value of the block of assets at prescribed rates (section 33(3)(a)). If an asset is only partly used for business, the deduction is restricted to a fair proportion (section 33(3)(b)).

Key rules to remember

Inventory valuation rule
Value = lower of (actual cost, NRV)
Section 277(1)(i). Applies to inventory generally, as computed per the notified ICDS.
Net realisable value
NRV = Estimated selling price − Estimated cost of completion − Estimated selling costs
Compare with cost for each item or category as the standard requires.
Cost of inventory
Cost = Purchase price + Conversion costs + Other costs to bring goods to present location and condition + Taxes, duties, cess or fees paid or incurred
Section 277(1)(ii) and (4). Include the tax even if a credit or right arises from paying it.
Unlisted or irregularly quoted securities
Value = actual cost initially recognised
Section 277(1)(iii). Applies to securities held as inventory that are not listed, or are listed but not quoted with regularity. No lower-of-cost-or-NRV test.
Other securities
Value = lower of (cost, NRV), compared category-wise
Section 277(1)(iv) and 277(3).
Depreciation on a block
Depreciation = Prescribed % × WDV of the block
Section 33(1) and (3)(a). Covers buildings, machinery, plant, furniture and specified intangibles acquired on or after 1 April 1998 (not goodwill), used wholly and exclusively for business.
Half-rate rule
If acquired in the tax year and used for less than 180 days: normal depreciation = 50% of prescribed rate
Section 33(4). It restricts normal depreciation only, not additional depreciation.
Additional depreciation
20% of actual cost of new machinery or plant (10% if used for less than 180 days, and 10% in the next tax year)
Section 33(8) and (9). Only for manufacture, production, or power generation, transmission or distribution, and subject to the listed exclusions.

How to solve ICDS II and ICDS V: Valuation of Inventories and Tangible Fixed Assets questions

Use this order for any question on inventory valuation or depreciation under the Act and the ICDS.

  1. 1Identify what the item is: inventory, securities, or a fixed asset. The rule differs for each.
  2. 2Build actual cost: add purchase price, conversion costs and other costs to bring goods to location and condition.
  3. 3Add any tax, duty, cess or fee paid or incurred for the goods, even if a credit or right arises from the payment (section 277(1)(ii) and (4)).
  4. 4Work out NRV: expected selling price less costs to complete and sell.
  5. 5Apply the lower of cost and NRV for ordinary inventory. For securities not listed, or listed but not quoted with regularity, use actual cost only. For other securities compare category-wise.
  6. 6Compute the effect on closing stock and business profit, and state the adjusted figure.
  7. 7For fixed assets, check the asset is covered by section 33(1) (tangible assets, or specified intangibles acquired on or after 1 April 1998, not goodwill) and fix its actual cost. Then check the block and apply the prescribed rate. Apply the 180-day half-rate rule to normal depreciation only, and add any additional depreciation separately.

Quickest way: Cost-NRV-Tax Check

When to use it: Use for numerical questions asking the closing stock value or the adjustment to book profit.

  1. Write cost and NRV side by side for each item or category.
  2. Check whether duty or tax paid is already in cost. If not, add it.
  3. Pick the lower figure, except for unlisted or irregularly quoted securities, where you take cost.
  4. Sum the values and compare with the book figure to find the adjustment.

Common mistakes in ICDS II and ICDS V: Valuation of Inventories and Tangible Fixed Assets

  • Excluding duty or tax from cost because credit is available.

    Students follow the accounting habit of treating recoverable tax as a receivable.

    Fix: Section 277(4) includes such payment irrespective of any right arising. Add it to cost for this section.

  • Applying lower of cost and NRV to securities that are unlisted or not quoted regularly.

    Students treat all securities alike.

    Fix: Securities held as inventory that are not listed, or are listed but not quoted with regularity, are valued at actual cost initially recognised (section 277(1)(iii)).

  • Comparing cost and NRV for securities in total instead of by category.

    It looks simpler to net gains against losses.

    Fix: Section 277(3) requires category-wise comparison, so do not offset across categories.

  • Allowing full-year depreciation on an asset used for under 180 days.

    Students forget the acquisition and use dates.

    Fix: If acquired in the year and used for less than 180 days, restrict normal depreciation to 50% of the prescribed rate.

  • Claiming additional depreciation on any new asset.

    Students ignore the conditions.

    Fix: It is for manufacturers or power businesses, and not for office appliances, road transport vehicles or assets in office or residential premises.

Worked examples

Example 1

A trader holds goods bought for ₹4,00,000. Customs duty of ₹40,000 was paid on them, for which he claims credit. Freight inwards was ₹10,000. The estimated selling price is ₹5,00,000 and selling costs are ₹30,000. Find the value of closing inventory.

Show the solution
  1. Cost = 4,00,000 + 40,000 + 10,000 = ₹4,50,000. Duty is included even though credit is available.
  2. NRV = 5,00,000 − 30,000 = ₹4,70,000.
  3. Lower of cost ₹4,50,000 and NRV ₹4,70,000 is ₹4,50,000.

Answer: Closing inventory is valued at ₹4,50,000.

Example 2

A company bought machinery on 1 January in the tax year for ₹10,00,000 and put it to use on the same day. It is a manufacturer and the machinery meets all conditions for additional depreciation. The prescribed rate is 15%. Compute total depreciation for the year, ignoring other assets in the block.

Show the solution
  1. The machinery is used from 1 January to 31 March, which is 31 + 28 + 31 = 90 days (taking a non-leap year). That is under 180 days and the asset was acquired in the tax year, so the 50% rule in section 33(4) applies to normal depreciation.
  2. Assume the machinery is the only asset in its block, so normal depreciation is worked on its cost. Normal depreciation = 50% × 15% × 10,00,000 = ₹75,000.
  3. The 50% restriction in section 33(4) applies only to normal depreciation. It is not applied to additional depreciation.
  4. Additional depreciation under section 33(9)(b): used for less than 180 days, so 10% of actual cost = 10% × 10,00,000 = ₹1,00,000 this year, and another 10% (₹1,00,000) in the next tax year.
  5. Total this year = 75,000 + 1,00,000 = ₹1,75,000.

Answer: Depreciation for the year is ₹1,75,000 (₹75,000 normal and ₹1,00,000 additional), with a further ₹1,00,000 additional depreciation in the next tax year.

Exam tips

  • Quote section 277 for inventory and section 33 for depreciation. Examiners reward the correct section.
  • Always show cost and NRV workings separately, then state the lower.
  • Remember that tax paid goes into cost even when credit exists.
  • Check the 180-day test and the additional depreciation conditions line by line in depreciation cases.

Practice questions from Income Computation and Disclosure Standards (ICDS)

ICDS II and ICDS V: Valuation of Inventories and Tangible Fixed Assets: frequently asked questions

How does ICDS II differ from AS 2?

ICDS II is used only to compute taxable business income, while AS 2 is an accounting standard for financial statements. Under the Act, tax or duty paid on goods must be added to cost irrespective of any credit right. Securities also have their own valuation rules.

How do I value inventory as per ICDS?

Take the lower of actual cost and NRV. Cost includes purchase price, conversion costs, other costs to bring goods to their location and condition, and any tax or duty paid. For securities held as inventory there is an exception: those not listed, or listed but not quoted with regularity, are valued at actual cost initially recognised.

Is the lower of cost and NRV test item-wise or total?

For securities the Act says the comparison is category-wise. For other inventory, compare item by item or by similar groups as the standard requires, and avoid netting unrelated items.

Does depreciation depend on whether I claim it in my books?

No. Section 33(7) says the section applies whether or not you claim depreciation in computing total income.