BooksIQExpenditure incurred to EARN income that is NOT part of total income (e.g. dividends taxed at company level until FY 19-20, certain mutual-fund gains, agricultural income) is DISALLOWED. When direct identification isn't possible, Rule 8D applies — 1% of annual average investments yielding exempt income.
Key points
- §14A disallows any expenditure incurred IN RELATION TO income which does NOT form part of total income under the Act (i.e. exempt income — agricultural income, share of profits from a firm, etc.).
- The Assessing Officer applies §14A ONLY if not satisfied with the assessee's claim of the actual disallowance (i.e. operator must FIRST self-disallow).
- RULE 8D mechanism (applies when self-disallowance is rejected): Disallowance = (a) actual expenditure DIRECTLY related to exempt income + (b) 1% of the ANNUAL AVERAGE of the monthly opening and closing values of investments, income from which does not form part of total income.
- Finance Act 2022 clarified §14A applies even if no exempt income is actually earned in the relevant year — earlier judicial view to the contrary (Cheminvest, Holcim) is overridden prospectively from AY 2022-23.
- Disclosed in Clause 21(h) of Form 3CD.
- Auditors verify linkage between investments and borrowed funds.
Reference: §14A read with Rule 8D, ITA 1961 — under ITA 2025 (FY 26-27 onwards), this is §14
This page is general information for Indian businesses, current as of the
financial year shown above — not legal or tax advice. Tax law changes,
and how a provision applies depends on your specific facts. Confirm the
current position with a qualified professional before you act.
Stop looking up sections. Ask your own books.
BooksIQ answers tax, GST and compliance questions from your actual Tally data — in plain English or Hindi.
See how it works