Short answer: Yes, they can be shown in the project cost, but whether the bank finances them depends on the lender and the scheme. Advance rent is a prepaid expense. A refundable security deposit is money that comes back to you, so lenders often treat it differently from machinery or construction. Under PMEGP, land cost is excluded, but a leased or rented work shed can be included for a maximum of 3 years. Always confirm the rule for your own scheme and bank.
If you are setting up a unit in rented premises, the first question you meet while preparing the project report is simple: the landlord wants a deposit and some rent in advance, so does that money count as part of the project?
Sharda Associates is a CA-led firm that has prepared over 45,500 CA-certified reports, including project reports for businesses seeking bank finance. This question comes up often, and the honest answer is not a flat yes or no. It depends on what the money is, which scheme or lender you apply to, and how clearly it is documented.
What Is the Difference Between Security Deposit and Advance Rent?
| Item | Refundable? | Accounting nature | Why it matters for project cost |
| Security deposit | Usually yes, at the end of the lease | An asset (a deposit you will get back) | Not an expense, so a lender may not treat it as a cost of setting up the unit |
| Advance rent | No, it is adjusted against future rent | A prepaid expense | It is rent for a period, so it relates to running costs rather than assets |
| Non-refundable premium or key money | No | A cost of obtaining the premises | May be treated as a set-up cost, subject to the lender |
Can a Security Deposit Be Included in Project Cost?
It can be listed in the report, but there is no single rule that every bank finances it. A refundable deposit does not create an asset the bank can hypothecate, and it returns to you later, so many lenders look at it more cautiously than plant or building cost. Others may allow it as part of the set-up requirement if it is needed to take possession of the premises.
What works in practice is transparency. Show the deposit as a separate line, state that it is refundable, and let the lender decide whether to finance it or treat it as your own contribution.
Can Advance Rent Be Included in Project Cost?
Advance rent covers a period of occupation, so it behaves like a running expense, not a fixed asset. Reports commonly show the first few months of rent under pre-operative costs or within the working capital requirement. Again, the lender decides how it is treated.
For PMEGP, the scheme guidance says the cost of land cannot be included, but the cost of a ready-built shed or a long lease or rented work shed can be included, restricted to a maximum period of 3 years. The guidance speaks of rent or lease cost. It does not specifically mention a refundable deposit, so ask your bank or the implementing agency how a deposit will be treated.
How Do Lenders Usually Look at These Items?
There is no universal formula, but these are reasonable questions a lender may ask:
- Is the amount needed to take possession of the premises for the project?
- Is it refundable, and when?
- Is it reasonable compared with the monthly rent and local practice?
- Is it backed by a rent or lease agreement and a landlord receipt?
How Should You Show Them in the Project Report?
- List the deposit and advance rent as separate lines, never merged into land or building cost.
- Mark the deposit as refundable and note the lease period.
- Show advance rent as covering a stated number of months.
- State in the means of finance whether the amount is part of your own contribution or the loan request.
- Keep the totals consistent across the cost of project, means of finance and projections.
Here is an illustration with made-up figures: monthly rent ₹20,000, deposit of 3 months (₹60,000) and 1 month of advance rent (₹20,000). The report shows ₹60,000 as a refundable deposit and ₹20,000 as advance rent, so the lender can treat each correctly.
Which Documents Support the Claim?
- Signed rent or lease agreement showing deposit, rent and period
- Landlord’s receipt or bank proof of payment
- Proof of the landlord’s ownership or authority to let the premises
- A no-objection letter for the intended business activity, where needed
What Mistakes Cause Queries?
- Adding the deposit to land or building cost
- Showing a deposit far above what the rent supports
- No agreement, or an agreement that does not match the figures
- Assuming one scheme’s rule applies to another
Conclusion
Security deposit and advance rent can appear in the project cost, but they are different items and a lender may treat them differently. The safe approach is to show each separately, label it correctly, support it with documents, and confirm the treatment with your bank or scheme guidelines before you finalize the report.
Most queries here come from vague presentations rather than from the amounts themselves. A report that clearly separates a refundable deposit from advance rent, and keeps the figures consistent across the cost and the means of finance, leaves the lender with less to question.
Sharda Associates prepares CA-certified project reports and typically delivers within 24-48 hours once your inputs are ready. No one can promise a sanction, since that depends on the lender and your proposal. Call +91 89899 77769 to get your project cost structured correctly.
Frequently Asked Questions
1. Is security deposit part of project cost?
It can be shown in the report, but whether it is counted as financeable project cost depends on the lender and scheme.
2. Is advance rent a project cost?
It is a prepaid rent expense. Many reports show initial months of rent under pre-operative costs or working capital, subject to the lender.
3. Can I include rent under PMEGP?
The scheme guidance allows the cost of a leased or rented work shed, restricted to a maximum of 3 years. Land cost is not allowed.
4. Does PMEGP allow a refundable security deposit?
The guidance refers to rent or lease cost and does not specifically mention deposits, so confirm with your bank or the implementing agency.
5. Why do banks treat refundable deposits differently from machinery?
A deposit returns to you and is not an asset the bank can hypothecate, so lenders may look at it more cautiously.
6. What if the bank does not finance the deposit?
You can show it as part of your own contribution in the means of finance.
7. Which documents do I need?
A signed rent or lease agreement, payment proof, and proof of the landlord’s ownership or authority.