The Direct Tax Code (DTC) 2025 imposes specific timelines for deployment of capital raised through approved infrastructure bonds and mutual fund investments. The one-year rule and three-year rule are critical compliance requirements that determine the eligibility of the tax benefits. This guide explains these timelines and their compliance implications.
The Statutory Framework
Schedule XV — Deployment Requirements
Schedule XV of the DTC provides for deduction under Section 123 in respect of subscriptions to:
- Equity shares or debentures forming part of any eligible issue of capital approved by the Board (public companies)
- Units of any mutual fund approved by the Board (mutual funds)
Rule 331 — Approval Conditions
Rule 331 of the Income-tax Rules, 2026 prescribes the deployment conditions for approved entities.
The One-Year Rule
Requirement
25% or more of the capital raised must be invested in the infrastructure facility before the end of one year from the date of approval by the Board.
Application
| Entity | Applicability |
|---|---|
| Public Companies | Yes |
| Mutual Funds | Yes |
Calculation
- Start Date: Date of approval by the Board
- End Date: One year from the date of approval
- Amount: 25% or more of the capital raised
Consequences of Non-Compliance
Failure to comply with the one-year rule may result in:
- Withdrawal of approval
- Loss of tax benefits for subscribers
- Disallowance of deductions
The Three-Year Rule
Requirement
The rest of the capital must be invested in like manner within three years from the date of approval.
Application
| Entity | Applicability |
|---|---|
| Public Companies | Yes |
| Mutual Funds | Yes |
Calculation
- Start Date: Date of approval by the Board
- End Date: Three years from the date of approval
- Amount: Remaining capital (beyond the 25% deployed in the first year)
Consequences of Non-Compliance
Failure to comply with the three-year rule may result in:
- Withdrawal of approval
- Loss of tax benefits for subscribers
- Disallowance of deductions
Comparison of Timelines
| Aspect | One-Year Rule | Three-Year Rule |
|---|---|---|
| Timeline | 1 year from approval | 3 years from approval |
| Deployment | 25% or more of capital | Rest of the capital |
| Applicability | Public Companies, Mutual Funds | Public Companies, Mutual Funds |
| Consequences | Approval withdrawal | Approval withdrawal |
| Compliance | Annual certificate | Annual certificate |
Key Differences
Nature of Requirement
- One-Year Rule: Initial deployment requirement (25% minimum)
- Three-Year Rule: Final deployment requirement (100% deployment)
Flexibility
- One-Year Rule: Less flexible, strict timeline
- Three-Year Rule: More flexible, longer timeline
Monitoring
- One-Year Rule: Critical milestone
- Three-Year Rule: Final compliance check
Practical Compliance
For Public Companies
Public companies must:
- Plan capital deployment to meet both timelines
- Monitor deployment progress regularly
- Submit annual certificates
- Maintain proper records
- Ensure compliance to avoid approval withdrawal
For Mutual Funds
Mutual Funds must:
- Plan capital deployment to meet both timelines
- Monitor deployment progress regularly
- Submit annual certificates
- Maintain proper records
- Ensure compliance to avoid approval withdrawal
Documentation
Entities should maintain:
- Records of capital raised
- Records of investments made
- Deployment certificates
- Compliance certificates
Consequences of Failure
Withdrawal of Approval
The Board shall have the power to withdraw the approval if the entity:
- Fails to make investments as per the conditions; or
- Fails to file the certificate as required
Loss of Tax Benefits
If the approval is withdrawn:
- Subscribers may lose the benefit of deduction under Section 123
- The entity may lose its approved status
- Future issues may not be eligible for the tax benefits
Interest and Penalty
Failure to comply with the deployment requirements may also result in:
- Interest on tax benefits claimed
- Penalty for incorrect claims
- Prosecution for wilful default
Best Practices
Planning
Entities should:
- Plan capital deployment in advance
- Identify suitable infrastructure projects
- Ensure projects are eligible
- Allocate resources appropriately
Monitoring
Entities should:
- Monitor deployment progress regularly
- Track compliance with timelines
- Identify and address delays promptly
- Maintain proper documentation
Reporting
Entities should:
- Submit annual certificates on time
- Provide accurate information
- Maintain proper records
- Respond to regulatory inquiries promptly
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on infrastructure capital deployment compliance. Our direct tax experts help entities understand the deployment timelines, comply with the requirements, and navigate the regulatory framework. We assist in deployment planning, compliance monitoring, and representation before the Board.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on infrastructure capital deployment or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the infrastructure capital deployment framework requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Deployment Planning: Strategic planning for capital deployment
- Compliance Advisory: Guidance on meeting deployment timelines
- Representation: Representation before the Board
- Risk Management: Mitigating compliance risks
Contact us for expert legal guidance on your infrastructure capital deployment matters.