Section 10(40): Tax Exemption for Grants to Power-Generating Subsidiaries
Section 10(40) of the Income-tax Act, 1961 provided a specific exemption for qualifying income received by a subsidiary company from its Indian holding company for the revival or reconstruction of an existing power-generation business. It was not a general exemption for every payment between a holding company and its subsidiary.
Meaning and scope of section 10(40)
The former section 10(40) dealt with income received by a subsidiary company by way of a grant or otherwise from an Indian company that is its holding company, where the payment was for the revival or reconstruction of an existing business of power generation. The statutory conditions must be satisfied; merely describing a payment as a grant does not make it exempt.
Holding company and subsidiary company: These expressions describe a parent-subsidiary relationship under applicable company law. Section 2(46) and section 2(87) of the Companies Act, 2013 provide relevant definitions. A company may be a subsidiary where the other company controls its board composition or exercises the prescribed degree of control over its share capital or voting power, as applicable.
Indian company: Under the 1961 Act, section 2(26) defined an Indian company with reference to incorporation or formation under Indian law and related statutory conditions. A foreign parent does not qualify merely because it owns shares in an Indian subsidiary.
Eligible assessee, qualifying income and amount exempt
| Requirement | Section 10(40) position under the 1961 Act |
|---|---|
| Eligible assessee | A subsidiary company receiving qualifying income. |
| Source of payment | Its holding company, which must be an Indian company. |
| Nature of receipt | A grant or other qualifying income from that holding company. |
| Permitted purpose | Revival or reconstruction of an existing power-generating business. |
| Amount exempt | The entire receipt to the extent it satisfies the statutory exemption, rather than all receipts from the parent. |
Conditions for the historical exemption
- Subsidiary relationship: The recipient must be a subsidiary of the paying holding company.
- Indian holding company: The payment must originate from a holding company qualifying as an Indian company.
- Qualifying receipt: The subsidiary must receive income by way of grant or otherwise from that holding company.
- Specific use: The payment must be for revival or reconstruction of an existing power-generation business, not simply for an unrelated project or ordinary group funding.
- Evidence: The recipient should maintain the grant agreement, board approvals, proof of parent-subsidiary status, revival plan, project records and supporting accounts.
What section 10(40) does not automatically exempt
- Routine sales revenue, interest, dividends, management fees or other unrelated income.
- Payments from a foreign holding company merely because the subsidiary operates in India.
- Funding for an unrelated line of business or an entirely new power project where the statutory revival or reconstruction condition is not met.
- All intercompany transfers, loans or capital contributions without examining their actual character and relevant tax treatment.
The tax treatment of a payment depends on its legal and accounting character. A receipt that is capital in nature may need separate analysis rather than reliance on this exemption.
Illustration: revival of an existing power plant
Suppose an Indian holding company provides Rs. 5 crore to its subsidiary under a documented plan to revive an existing, financially distressed electricity-generating undertaking. If the receipt and the corporate relationship satisfy all conditions of the historical section 10(40), the qualifying income could be exempt under that provision for a year governed by the 1961 Act. If the same funds were paid for an unrelated real-estate project, section 10(40) would not apply merely because the payer was the holding company.
Documentation and tax-return considerations
Companies considering this relief should identify the relevant tax year, determine whether the receipt constitutes income, verify the applicable legislation and retain evidence of the revival or reconstruction purpose. Exempt receipts should be disclosed in the appropriate tax-return schedules where required. The existence of an exemption does not dispense with applicable accounting, audit, company-law or reporting obligations.
Income-tax Act, 2025: check the provision applicable in 2026
The Income-tax Act, 2025 replaced the 1961 Act for the tax years beginning 1 April 2026. References to section 10(40) on older webpages and historical assessments should therefore be read as references to the 1961 Act. For a present-day claim, consult the enacted and amended 2025 Act rather than assuming that the old section number continues unchanged.
Official legislation and further reading
- Income-tax Act, 2025, as amended by Finance Act, 2026
- Income Tax Department: legislation and guidance
- India Code: Income-tax and Companies Acts
- Income Tax e-Filing portal
- Section 10(40) exemption and conditions
- Other exemptions under former section 10
- Tax-exempt income overview
Frequently asked questions
Does section 10(40) exempt all income received from a holding company?
No. The historical exemption was limited to qualifying income received from an Indian holding company for revival or reconstruction of an existing power-generation business.
Who was eligible for the section 10(40) exemption?
A subsidiary company meeting the specified conditions; it was not a general exemption for individuals or every company.
Was the full qualifying grant exempt?
Under the historical provision, the qualifying income was excluded from total income, subject to satisfaction of the statutory conditions.
Can the old section number be used for tax year 2026-27?
The Income-tax Act, 2025 applies from 1 April 2026. The corresponding current-law provision and any conditions must be checked before making a claim.
This article provides general tax information and does not replace an assessment of the relevant legislation, notifications and facts.