Section 277 of the Income-tax Act, 2025 — Method of Accounting: Valuation of Inventory and Securities

In plain language

What Section 277 actually deals with (scope verified)

An important clarification first, because the section number is easy to confuse. Under the old Income-tax Act, 1961, Section 277 was the criminal-prosecution provision for a "false statement in verification". That offence has not been carried into Section 277 of the new Act — it now sits in Section 482 of the Income-tax Act, 2025. In the Income-tax Act, 2025 (effective 1 April 2026), Section 277 is titled "Method of accounting in certain cases" and lays down how you must value inventory (stock-in-trade) and securities when computing income under the head "Profits and gains of business or profession." It is the direct successor to Section 145A of the 1961 Act.

So this page is not about assessment notices, reassessment, or prosecution. It is a computation rule that decides the rupee figure at which your closing stock and securities enter your taxable profit.

The core valuation rules in Section 277(1)

• Inventory — lower of cost or net realisable value (NRV): Stock-in-trade is valued at the lower of actual cost or net realisable value, computed in line with the Income Computation and Disclosure Standards (ICDS) notified under Section 276(2). This is the classic conservative accounting rule — you cannot book unrealised profit on unsold stock, but you must recognise a foreseeable loss.
• Inclusive method for taxes and duties: The valuation of purchase and sale of goods/services and of inventory must include any tax, duty, cess or fee actually paid or incurred to bring the goods or services to their present location and condition. This is the "inclusive method" — GST, customs duty, etc. sitting in closing stock get added to its value.
• Unlisted / thinly traded securities — at cost: Securities not listed on a recognised stock exchange, or listed but not quoted with regularity, are valued at the actual cost initially recognised per ICDS.
• Other (listed and regularly quoted) securities — lower of cost or NRV: All other securities are valued at the lower of actual cost or net realisable value under ICDS.

Special rules — sub-sections (2) to (5)

• Banks and financial institutions [277(2)]: Securities held by a scheduled bank or a public financial institution are valued in accordance with ICDS read with the extant RBI guidelines. This lets regulated entities align tax valuation with their prudential (RBI) framework.
• Category-wise comparison [277(3)]: For securities, the comparison of actual cost and NRV must be done category-wise, not security-by-security. You group similar securities and compare aggregate cost with aggregate NRV.
• Wide meaning of "tax, duty, cess or fee" [277(4)]: Such amounts are included in valuation regardless of any right arising as a consequence of the payment — i.e., even if input credit is available, the gross amount is used for the inclusive-method computation (the credit is then adjusted so profit is not distorted).
• Definition [277(5)]: "Public financial institution" takes the meaning in section 2(72) of the Companies Act, 2013.

Who this applies to

• Every taxpayer with business or professional income that holds inventory or securities as stock-in-trade — traders, manufacturers, dealers in shares/securities, retailers, etc.
• Banks, NBFCs and public financial institutions holding securities, with the RBI overlay in 277(2).
• It does not apply to investments held as capital assets — those are governed by the capital-gains provisions, not this section.

How it interacts with related sections

• Section 276 (Method of accounting / ICDS): Section 276 requires business income to be computed on the cash or mercantile system and empowers notification of ICDS; Section 277 is the specific valuation carve-out that overrides the general method for inventory and securities.
• ICDS II (Valuation of Inventories) and ICDS VIII (Securities): These standards supply the operational detail that Section 277 refers to.
• Section 145A of the 1961 Act: The provision Section 277 replaces — the substance is carried forward almost unchanged.

Practical implications

• Because taxes/duties in closing stock are added to inventory value, the inclusive method can raise closing stock value and hence taxable profit in a year — but it is generally profit-neutral over time because opening stock and purchases/sales are adjusted symmetrically.
• You cannot cherry-pick: NRV can only reduce value, never inflate it. Unrealised gains stay untaxed until sale.
• Category-wise comparison for securities means a loss on one script cannot be freely set off against a gain on another outside its category.
• Poor documentation of cost and NRV is the most common trigger for additions during assessment, so keep valuation working papers.