The Income Tax Department has provided a detailed list of the Income Computation and Disclosure Standards (ICDS) along with the key reconciliations required between Accounting Standards and ICDS for computing taxable income.
The document, issued under the Income-tax Act, 2025 and amended by the Finance Act, 2026, explains how ICDS are intended to bring greater uniformity in the computation of taxable income and reduce litigation arising from differences in accounting treatment.
For businesses and professionals following the mercantile system of accounting, understanding these differences is important because the profit reported in financial statements may need specific adjustments while determining taxable income.
What Are ICDS?
ICDS stands for Income Computation and Disclosure Standards. According to the Income Tax Department document, ICDS have been issued by the Central Government under section 276(2) of the Income-tax Act, 2025.
The objective is to bring uniformity in accounting policies and provisions used for income-tax computation and to reduce litigation.
The document lists the following 10 notified ICDS:
- ICDS I - Accounting Policies
- ICDS II - Valuation of Inventories
- ICDS III - Construction Contracts
- ICDS IV - Revenue Recognition
- ICDS V - Tangible Fixed Assets
- ICDS VI - The 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
ICDS Applies to Tax Computation, Not Maintenance of Books
One of the important points highlighted in the document is that ICDS applies only for computation of taxable income and does not prescribe how books of account should be maintained.
Taxpayers earning income under "Profits and gains from business or profession" or "Income from other sources", or both, are required to compute taxable income in accordance with the notified ICDS where applicable.
The document specifically states that ICDS is to be followed where the assessee maintains accounts under the mercantile system of accounting.
This creates an important distinction between financial reporting and tax computation. A taxpayer may prepare financial statements according to the applicable accounting framework, but the resulting profit may need adjustments to arrive at income in accordance with ICDS.
Why Is Reconciliation Between Accounting Standards and ICDS Required?
Accounting profit and taxable profit do not always follow identical recognition and measurement principles.
The Income Tax Department document therefore provides reconciliation formats that can be used to move from profit before tax as per financial statements to profit or loss as per ICDS.
In practical terms, the reconciliation starts with the profit reported in the financial statements and then identifies amounts that need to be added back or deducted for tax computation.
The reconciliation framework covers ICDS II to ICDS X, with adjustments varying according to the subject matter of each standard.
ICDS II: Valuation of Inventories
Under ICDS II, the reconciliation primarily addresses differences relating to the valuation of inventories.
The document provides for an adjustment where there is a difference in the value of inventories in specified circumstances, including cases involving a partnership firm, AOP or BOI under dissolution where the NRV of inventory exceeds its cost.
The reconciliation ultimately derives the net profit or loss before tax as per ICDS.
ICDS III: Construction Contracts
Construction contracts can create significant differences between accounting recognition and tax computation.
The reconciliation under ICDS III covers items such as:
- Expected losses where total contract cost is likely to exceed total contract revenue.
- Costs recognised under Accounting Standard 7 where the revenue recognition method differs from the prescribed approach.
- Revenue and costs where the percentage of completion exceeds 25% but the outcome of the contract cannot be reliably estimated.
- Revenue or costs recognised differently in the books compared with ICDS requirements.
The reconciliation therefore requires taxpayers to carefully compare the revenue and cost recognised in their books with the amounts determined under ICDS III.
ICDS IV: Revenue Recognition
ICDS IV deals with revenue recognition and requires reconciliation of various income and expense items.
The document identifies, among other items:
- Expenses deducted from dividend income under accounting principles.
- Deemed dividend covered under the specified provisions.
- Revenue not recognised in the current year because the assessee followed the service completion method in its books.
- Interest on income-tax refunds.
- Interest on compensation or enhanced compensation.
The reconciliation also considers income already credited to the profit and loss account but not taxable in the same manner under ICDS.
ICDS V: Tangible Fixed Assets
ICDS V can have a significant impact on tax computation because the treatment of tangible fixed assets under accounting standards may differ from the tax treatment.
The reconciliation includes adjustments relating to:
- Stand-by and servicing equipment.
- Certain machinery spares.
- Interest expense arising from deferred payment beyond normal credit terms.
- Impairment provisions.
- Foreign exchange losses.
- Loss on sale of fixed assets.
- Book depreciation.
- Abnormal costs incurred in self-construction of an asset.
- Revaluation losses.
- Decommissioning and restoration-related amounts.
- Certain inspection costs.
- Replaced components derecognised in financial statements.
The document also provides corresponding deductions, including depreciation under the Income-tax Act, gains on disposal of fixed assets and certain other adjustments.
Reconciliation of the Block of Assets
ICDS V also provides a separate reconciliation for calculating the written-down value (WDV) of a block of assets for depreciation purposes.
The reconciliation can require additions or deductions for items such as stand-by equipment, eligible spare parts, interest components, foreign exchange differences, revaluation adjustments, assets retired from active use and replaced components.
ICDS VI: Effects of Changes in Foreign Exchange Rates
Foreign currency transactions can generate another important area of difference between accounting profit and taxable income.
The ICDS VI reconciliation covers items including:
- Exchange losses relating to acquisition of depreciable and non-depreciable assets.
- Amortisation of the Foreign Currency Monetary Item Translation Difference Account (FCMITDA).
- Exchange losses on restatement of non-monetary items.
- Conversion of business income.
- Conversion of income subject to TDS.
- Mark-to-market gains and losses on specified forward exchange contracts.
- Changes in fair value or exchange differences relating to hedging contracts.
The document also provides a separate reconciliation for the block of assets where foreign exchange differences affect the tax WDV.
ICDS VII: Government Grants
Government grants are another area where accounting treatment and tax computation can differ.
The reconciliation identifies, among other things, government grants received but not recognised as income under Accounting Standard 12 because conditions attached to the grant had not yet been fulfilled.
It also covers depreciation, refunds of grants relating to depreciable assets and grants recognised using the income approach under accounting principles.
A separate block-of-asset reconciliation is provided for grants relating to depreciable assets.
ICDS VIII: Securities
The reconciliation under ICDS VIII deals with the taxation of securities and differences arising from their valuation and disposal.
The document specifically covers adjustments relating to:
- Mark-to-market losses on listed securities.
- Reversal of previously recognised losses.
- Restatement of unlisted securities.
- Profit or loss on sale of securities.
- Exchange of securities.
- Differences between accounting and ICDS principles.
Key Difference in Valuation of Securities
The document highlights several differences in valuation:
| Category | Accounting Standards | ICDS |
|---|---|---|
| Securities acquired for cash | At cost | At cost |
| Listed securities | Individually valued at cost or NRV, whichever is lower | Category-wise valued at cost or NRV, whichever is lower |
| Unlisted securities | Cost or NRV, whichever is lower | Cost only |
The document therefore identifies changes between accounting treatment and ICDS treatment for certain categories of securities.
ICDS IX: Borrowing Costs
Borrowing costs are another important reconciliation area.
The ICDS IX reconciliation includes borrowing costs incurred:
- Between the date an asset is available for use and the date it is actually put to use.
- During periods when construction or development is suspended.
- In relation to foreign exchange differences included in interest costs.
The block-of-asset reconciliation also considers borrowing costs and foreign exchange gains or losses that may have been treated differently under accounting principles and tax provisions.
ICDS X: Provisions, Contingent Liabilities and Contingent Assets
ICDS X addresses provisions and related liabilities.
The reconciliation provides for an adjustment where a provision is made in the books but there is no reasonable certainty of an outflow of economic benefits for settling the related liability.
It also covers provisions and interest recognised until the actual expense is incurred. The actual expense incurred against a provision may subsequently be considered as an allowable expense in the reconciliation.
Key Takeaway for Businesses and Tax Professionals
The ICDS framework reinforces an important principle: book profit and taxable income may not always be the same.
For taxpayers covered by ICDS, the financial statements provide the starting point, but specific tax adjustments may be required before arriving at taxable income.
The Income Tax Department's reconciliation document provides a practical framework for identifying these differences across inventory valuation, construction contracts, revenue recognition, fixed assets, foreign exchange, government grants, securities, borrowing costs and provisions.
For tax professionals, accountants and businesses, maintaining a clear reconciliation between accounting figures and ICDS-based figures can help make the tax computation process more systematic and reduce the risk of overlooking adjustments.
Important Note
The Income Tax Department document itself states that its contents are provided for information purposes and are intended to provide the public with quick and easy access to information. It also advises readers to verify the provisions with the relevant Government Acts, Rules and Notifications.
The document was downloaded/printed from the Income Tax Department website on 22 August 2026 and states that it incorporates amendments made by the Finance Act, 2026.
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