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

ICDS VIII, X and XI: Securities and Provisions

Updated 11 October 2026

ICDS VIII values stock-in-trade securities category-wise at lower of cost or net realisable value (unlisted or thinly traded ones at cost). ICDS X allows a provision only for a present obligation with probable outflow and reliable estimate. Contingent liabilities and assets are not recognised. Solve by classifying first, then applying the test.

Understand ICDS VIII, X and XI: Securities, Provisions and Other Standards

ICDS are standards notified under the Income-tax Act, 2025 to compute business income. They override ordinary accounting where the two differ. This page covers the standards on securities (ICDS VIII), provisions and contingencies (ICDS X), and the residual standards that tidy up the rest.

Securities (ICDS VIII) apply only to securities held as inventory (stock-in-trade), for example shares held by a dealer. Securities held as investments are not covered, because their gain is a capital gain. Section 277 of the Income-tax Act, 2025 sets the valuation rules. In general, inventory is valued at the lower of actual cost or net realisable value. For securities that are not listed on a recognised stock exchange, or are listed but not quoted there with regularity, the value is actual cost initially recognised. No write-down to market value is allowed for them. Other securities, that is, regularly quoted listed ones, go at lower of cost or net realisable value. The comparison is made category-wise, not item by item and not for the whole portfolio. A fall in one category cannot be set off against a rise in another.

Scheduled banks and public financial institutions are treated differently. Their securities are valued as per the ICDS after taking into account the extant Reserve Bank of India guidelines. 'Public financial institution' has the meaning given in section 2(72) of the Companies Act, 2013.

Provisions, contingent liabilities and contingent assets (ICDS X) deal with when an expense can be claimed in advance of payment. A provision is recognised only when you have a present obligation from a past event, an outflow of resources is probable, and a reliable estimate is possible. A contingent liability is a possible obligation, or a present obligation that does not meet these tests. It is not recognised. A contingent asset is a possible asset arising from past events, depending on uncertain future events. It is not recognised either. Under ICDS X, a contingent asset is not recognised. Under general accounting practice, disclosure also matters, but for tax the key point is the recognition test.

ICDS X is close to AS 29 in structure, but it is written for tax computation. It does not follow every accounting treatment, and it does not allow a provision merely because the books show one. Also, ICDS X does not apply to certain items covered by other standards, such as construction contracts or other matters dealt with elsewhere. The 'other standards' left, such as leases, are handled by the general rules of the Act and the framework you already know. Do not invent rules for them. If a question needs a lease treatment, read what the question tells you and apply the Act's provisions on business income.

Key rules to remember

Valuation of regularly quoted securities (stock-in-trade): Value = lower of (actual cost, net realisable value), compared category-wise; Based on section 277(1)(iv) and 277(3). Add up cost and NRV for each category, then take the lower per category.
Unlisted or thinly quoted securities: Value = actual cost initially recognised; Section 277(1)(iii). No write-down to NRV. Applies to unlisted securities and listed ones not quoted with regularity.
Cost to include taxes and duties: Cost = purchase price + tax, duty, cess or fee actually paid or incurred to bring goods to location and condition; Section 277(1)(ii) and (4). Applies irrespective of any right arising from such payment.
Provision test (ICDS X): Provision allowed only if: present obligation from past event AND outflow probable AND reliable estimate; If any limb fails, treat it as a contingent liability and make no provision for tax.
Contingent items: Contingent liability and contingent asset: not recognised; Recognise only when the uncertainty is resolved and the conditions are met.

How to solve ICDS VIII, X and XI: Securities, Provisions and Other Standards questions

Quickest way: Category table and three-limb test

When to use it: Use under time pressure in numerical questions with several security categories or a list of provisions.

Draw a small table: category, cost, NRV, classification, lower value.
Write 'cost' directly for unlisted or thinly quoted categories.
Write the lower value for the other categories, then total the column.
For provisions, tick or cross the three limbs. One cross means disallow the provision.
Compare with the book figure and write the adjustment as an increase or decrease in business income.

Common mistakes in ICDS VIII, X and XI: Securities, Provisions and Other Standards

Valuing the whole portfolio together, or item by item, instead of category-wise.
Students recall 'lower of cost or NRV' and apply it at the wrong level.
Fix: Section 277(3) requires a category-wise comparison. Group first, compare per group, then add.
Writing down unlisted shares to NRV.
The general inventory rule is applied without checking the security type.
Fix: Unlisted and not regularly quoted securities are held at actual cost initially recognised under section 277(1)(iii).
Applying ICDS VIII to shares held as investments.
The word 'securities' makes students think every holding is covered.
Fix: ICDS VIII applies only to stock-in-trade. Investments produce capital gains and follow other rules.
Allowing a provision because it is shown in the books.
Students follow accounting entries rather than the tax test.
Fix: Allow it only if all three limbs of ICDS X are met. Otherwise add it back.
Recognising a contingent asset when a claim is likely to succeed.
Students treat expected gains like probable losses.
Fix: Do not recognise a contingent asset. Recognise it only when realisation becomes certain.
Ignoring duties and fees in the cost of securities.
Students take only the price paid.
Fix: Include tax, duty, cess or fee actually paid or incurred to bring the goods to their location and condition, per section 277(1)(ii).

Worked examples

Example 1

Meera Traders deals in securities. At year end it holds, as stock-in-trade: (a) Category A, regularly quoted listed shares: cost ₹8,00,000, NRV ₹7,50,000; (b) Category B, regularly quoted listed debentures: cost ₹4,00,000, NRV ₹4,30,000; (c) Category C, unlisted shares: cost ₹3,00,000, NRV ₹2,40,000. Find the value of closing stock under the ICDS.

Show the solution

Category A is regularly quoted, so lower of cost ₹8,00,000 and NRV ₹7,50,000 is ₹7,50,000.
Category B is regularly quoted, so lower of cost ₹4,00,000 and NRV ₹4,30,000 is ₹4,00,000. The gain is not recognised.
Category C is unlisted, so value is actual cost ₹3,00,000. No write-down is allowed under section 277(1)(iii).
Total = ₹7,50,000 + ₹4,00,000 + ₹3,00,000 = ₹14,50,000.

Answer: Closing stock is valued at ₹14,50,000. The loss of ₹50,000 on Category A is allowed, the gain on B is ignored and the fall on C is not allowed.

Example 2

Rohan Ltd debits ₹6,00,000 in its books as a provision for a warranty claim by a customer. A notice has been received, but the company disputes the claim, and legal advice says an outflow is only possible, not probable. A separate ₹2,50,000 is provided for a warranty on goods already sold under a standard warranty, where the past experience clearly shows a probable outflow and a reliable estimate. Determine the adjustment to business income.