CBDT FAQ Deep-Dive #10: ICDS and Method of Accounting Under Sections 276 and 277 of the Income-tax Act 2025

Quick Summary: ICDS and Method of Accounting Under the Income-tax Act 2025

The renumbering: Section 145 of the Income-tax Act 1961 (Method of accounting) becomes Section 276 of the Income-tax Act 2025, and Section 145A (valuation of inventory and securities) becomes Section 277 of the Income-tax Act 2025, in force from 1 April 2026.
ICDS survives: the power to notify Income Computation and Disclosure Standards, earlier in Section 145(2), is re-enacted as Section 276(2). The ten notified ICDS continue to govern the computation of taxable income.
What ICDS does: ICDS overrides your books for tax purposes where the two differ, but only for income under “Profits and gains of business or profession” and “Income from other sources”, and only for assessees on the mercantile system.
Period-aware citation: for FY 2025-26 (AY 2026-27) cite Sections 145 and 145A of the 1961 Act; from FY 2026-27 (AY 2027-28) cite Sections 276 and 277 of the 2025 Act. The concepts do not change; the numbers do.
Where it shows up: in the ICDS adjustments and disclosures reported in Form 3CD, and in the deferred-tax and book-to-tax reconciliation your auditor will test.

This is chapter #10 in our CBDT FAQ Deep-Dive Series tracking the Income-tax Act 2025 transition, provision by provision. Earlier chapters covered inter-corporate dividends under Section 148 and scientific research and R&D under Section 45. This chapter takes on the plumbing that sits under every business computation: the method of accounting and the ICDS framework.

Why the Method of Accounting Provision Matters

Every rupee of business income you report starts from a method-of-accounting question. Do you follow cash or mercantile? Do your books, prepared under Ind AS or under the Accounting Standards, also decide your tax? The answer, for decades, has been that tax computation follows its own rulebook, and that rulebook is the method-of-accounting provision read with the ICDS. The Income-tax Act 2025 carries this architecture forward intact, but it lives at new section numbers, and getting the number wrong on a Form 3CD or an assessment submission from FY 2026-27 onward is an avoidable error.

Section 276: Method of Accounting (Successor to Section 145)

Section 276 of the Income-tax Act 2025 re-enacts the old Section 145. It provides that income chargeable under “Profits and gains of business or profession” or “Income from other sources” is computed in accordance with either the cash or the mercantile system of accounting regularly employed by the assessee.

Two further limbs matter:

Section 276(2) empowers the Central Government to notify Income Computation and Disclosure Standards to be followed by any class of assessees or in respect of any class of income. This is the direct successor to Section 145(2), and it is the anchor on which the entire ICDS framework rests.
Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts, or where the method or the notified ICDS has not been regularly followed, the officer retains the power to make a best-judgment assessment, carrying forward the substance of the old Section 145(3).

Section 277: Method of Accounting in Certain Cases (Successor to Section 145A)

Section 277 of the Income-tax Act 2025 supplements Section 276 and re-enacts Section 145A. It lays down mandatory valuation rules for inventory and securities:

Inventory is valued at the lower of actual cost or net realisable value, computed in accordance with the ICDS notified under Section 276(2).
The valuation of purchase and sale of goods or services, and the valuation of inventory, is adjusted to include any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods or services to their location and condition as on the valuation date. This is the “inclusive method” that has generated so much reconciliation work under GST.
Securities held as stock-in-trade follow their own valuation rule aligned to ICDS VIII.

The Ten ICDS That Continue to Apply

The ten Income Computation and Disclosure Standards notified under the old Section 145(2) continue to govern taxable-income computation, now anchored to Section 276(2):

ICDS	Subject
ICDS I	Accounting Policies
ICDS II	Valuation of Inventories
ICDS III	Construction Contracts
ICDS IV	Revenue Recognition
ICDS V	Tangible Fixed Assets
ICDS VI	Effects of Changes in Foreign Exchange Rates
ICDS VII	Government Grants
ICDS VIII	Securities
ICDS IX	Borrowing Costs
ICDS X	Provisions, Contingent Liabilities and Contingent Assets

The governing principle is unchanged: where an ICDS conflicts with your accounting treatment, the ICDS prevails for the purpose of computing taxable income, and the difference is reported as an ICDS adjustment.

Who Must Follow ICDS, and Who Is Outside It

Applies to: all assessees following the mercantile system of accounting, computing income under “Profits and gains of business or profession” or “Income from other sources”.
Does not apply to: an individual or a Hindu Undivided Family who is not required to get their accounts audited under the tax-audit provision, and assessees who follow the cash system.
Interaction with presumptive schemes: where income is offered on a presumptive basis, the presumptive computation governs, and ICDS does not separately re-open that computed income.

Common ICDS Adjustments You Will See in FY 2026-27 Computations

Revenue recognition (ICDS IV): ICDS generally denies deferral for expected credit losses and requires interest, royalty and dividend to be recognised on a defined basis, which can pull income forward compared with the books.
Construction contracts (ICDS III): percentage-of-completion is mandatory, and retention money and early-stage losses follow specific rules.
Government grants (ICDS VII): a grant cannot be postponed indefinitely; recognition is triggered even where books defer it.
Borrowing costs (ICDS IX): the capitalisation formula and the qualifying-asset period follow ICDS, not the accounting standard, where they differ.
Foreign exchange (ICDS VI): marked-to-market gains and losses on monetary items and the treatment of forward contracts follow ICDS rules that frequently diverge from Ind AS 21 and Ind AS 109.

Action Checklist for the FY 2026-27 Cycle

Update your computation templates and Form 3CD working papers to cite Sections 276 and 277 for FY 2026-27 onward, while keeping Sections 145 and 145A for the FY 2025-26 filing still in hand.
Rebuild the ICDS adjustment schedule for each of the ten standards and reconcile it to the profit-and-loss account.
Re-run the inclusive-method inventory valuation under Section 277, capturing GST and other levies actually paid or incurred, and reconcile to the books.
Where you have moved to the Ind AS 2026 amendments on ESG-linked loans and renewable power contracts, track the new book-to-tax differences those changes create, because ICDS does not follow fair value.
Document every ICDS adjustment with a clear audit trail; the disclosures are a standard scrutiny checkpoint.

Frequently Asked Questions

Which section of the Income-tax Act 2025 replaces Section 145?

Section 276 of the Income-tax Act 2025 (“Method of accounting”) replaces Section 145 of the 1961 Act, and Section 276(2) carries the power to notify ICDS, previously in Section 145(2).

Which section replaces Section 145A on inventory and securities valuation?

Section 277 of the Income-tax Act 2025 (“Method of accounting in certain cases”) replaces Section 145A. It requires inventory to be valued at the lower of actual cost or net realisable value and mandates the inclusive method for taxes, duties, cess and fees actually paid or incurred.

Do the ten ICDS continue under the new Act?

Yes. The ICDS notified earlier continue to govern the computation of taxable income, now anchored to Section 276(2) of the Income-tax Act 2025. The substance of the ten standards is unchanged; verify the operative notification text before relying on any specific paragraph.

From which assessment year do Sections 276 and 277 apply?

The Income-tax Act 2025 is in force from 1 April 2026, so Sections 276 and 277 apply from FY 2026-27 (AY 2027-28). For FY 2025-26 (AY 2026-27), the 1961 Act provisions, Sections 145 and 145A, still apply.

Does ICDS apply to a salaried individual?

No. ICDS applies only to income under “Profits and gains of business or profession” and “Income from other sources”, and not to an individual or HUF who is not required to get their accounts audited. It also does not apply to assessees following the cash system.

Source and Verification

Source: Sections 276 and 277 of the Income-tax Act 2025 (in force 1 April 2026), successors to Sections 145 and 145A of the Income-tax Act 1961. The 2025-Act section mapping was verified against the enacted-Act text via eztax.in/income-tax-act-2025/section-276 and section-277 and corroborated on AUBSP and TaxHeal enacted-Act indices, retrieved 1 September 2026. The ten ICDS notified under the earlier Section 145(2) continue to apply; verify the operative ICDS notification text on incometaxindia.gov.in before relying on a specific paragraph. Period-aware citation per our editorial policy: 1961 Act for FY 2025-26 and earlier, 2025 Act for FY 2026-27 onward.

Book a Quick Call

If your FY 2026-27 tax computation carries ICDS adjustments, inclusive-method inventory questions or fresh book-to-tax differences from the Ind AS 2026 changes, we can help you build a clean, defensible schedule before the return is filed. Book a quick call with Tax Update India and we will review your specific adjustments.

Disclaimer: This article is for general information only and does not constitute tax, accounting or legal advice. Section numbering under the Income-tax Act 2025 and the operative ICDS text should be verified against the primary source before use. Consult a qualified professional before acting on any position.

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CA Adityavikram Banka

Founder & Director at A S Banka Advisors Private Limited

The author is Founder of A. S. Banka Advisors Private Limited & Partner at Dhiraj & Dheeraj.

You can reach out to the author on : info@asbanka.com

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