Limitation on interest deduction in certain cases
[Section-177 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 177(1) of Income Tax Act 2025
177(1) Irrespective of anything contrary in this Act, any expenditure by way of interest or similar payment in respect of excess interest, as specified in sub-section (4), shall not be deductible in computation of income chargeable under the head “Profits and gains of business or profession”, if,—
- (a) it is paid or payable by an Indian company or a permanent establishment of a foreign company in India, in respect of any debt issued by an associated enterprise which is a non-resident; and
- (b) the sum of such expenditure in a tax year exceeds one crore rupees.
Section 177(2) of Income Tax Act 2025
177(2) Where a lender, not being an associated enterprise, has issued a debt referred to in sub-section (1), such debt shall be deemed to have been issued by an associated enterprise if an associated enterprise has—
- (a) provided an implicit or explicit guarantee to the lender in respect of such debt; or
- (b) deposited a corresponding and matching funds with such lender.
Section 177(3) of Income Tax Act 2025
177(3) The provisions of this section shall not apply to—
- (a) interest paid in respect of a debt issued by a lender which is a permanent establishment in India of a non-resident engaged in the business of banking;
- (b) an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance or a Finance Company located in any International Financial Services Centre, or such class of non-banking financial companies as notified by the Central Government in this behalf.
Section 177(4) of Income Tax Act 2025
177(4) In sub-section (1), the “excess interest” means––
- (a) In total interest paid or payable in excess of 30% of earnings before interest, taxes, depreciation and amortisation of the borrower in the tax year; or
- (b) interest paid or payable to associated enterprises for that tax year,
whichever is less.
Section 177(5) of Income Tax Act 2025
177(5) Interest expenditure not wholly deducted against income under the head “Profits and gains of business or profession” for any tax year shall be—
- (a) carried forward to the following tax year or years; and
- (b) allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for such tax year, to the extent of maximum allowable interest expenditure as per sub-section (4).
Section 177(6) of Income Tax Act 2025
177(6) The interest expenditure referred to in sub-section (5) shall not be carried forward for more than eight tax years immediately succeeding the tax year for which the excess interest expenditure was first computed.
Section 177(7) of Income Tax Act 2025
177(7) In this section,—
- (a) “debt” means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head “Profits and gains of business or profession”;
- (b) “Finance Company” means a finance company as defined in regulation 2(1)(e) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 and which satisfies such conditions and carries on such activities, as prescribed;
- (c) “permanent establishment” shall have the meaning assigned to it in section 173(c).
FAQs on Section 177 of Income Tax Act 2025
What is the main purpose of Section 177 of the Income Tax Act, 2025?
Section 177 limits the deduction of interest expenditure in certain cases where Indian entities or permanent establishments of foreign companies in India borrow from associated enterprises that are non-residents, in order to prevent base erosion and profit shifting.
To whom does Section 177 apply?
It applies to Indian companies and permanent establishments of foreign companies in India that incur interest expenditure exceeding ₹1 crore in a tax year on debt issued by non-resident associated enterprises.
What is ‘excess interest’ as defined in Section 177(4)?
‘Excess interest’ is the lesser of:
(a) total interest paid or payable in excess of 30% of the borrower’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), or
(b) interest paid or payable to associated enterprises in the tax year.
What happens if interest expenditure is considered ‘excess’?
The excess interest is disallowed as a deduction under the head “Profits and gains of business or profession” for that tax year.
Can disallowed interest be claimed in future years?
Yes, as per Section 177(5), the disallowed interest can be carried forward for up to eight tax years and deducted to the extent permissible in those years under the same rules.
Is there a time limit for carrying forward disallowed interest?
Yes, under Section 177(6), the disallowed interest cannot be carried forward beyond eight tax years from the year in which it was first computed as excess.
Are there any exceptions to the applicability of Section 177?
Yes, as per Section 177(3), the section does not apply to:
(a) interest paid to a lender which is a permanent establishment in India of a non-resident banking business;
(b) Indian companies or permanent establishments engaged in banking, insurance, or are finance companies in an International Financial Services Centre (IFSC), or certain notified non-banking financial companies.
How is a non-associated lender treated as an associated enterprise under this section?
Under Section 177(2), if an associated enterprise provides a guarantee or deposits matching funds with a lender who is not otherwise associated, that lender’s debt is deemed to have been issued by an associated enterprise.
What qualifies as ‘debt’ under Section 177?
‘Debt’ includes loans, financial instruments, finance leases, financial derivatives, or any arrangement that gives rise to interest or finance charges deductible under business income.
What is the threshold for interest expenditure to attract Section 177 provisions?
The threshold is interest or similar expenditure exceeding ₹1 crore in a tax year.
Does this section override other provisions of the Act?
Yes, Section 177 begins with a non-obstante clause, meaning it overrides other provisions of the Income Tax Act, 2025 to the extent of inconsistency.
What is the definition of a Finance Company under this section?
It refers to a finance company as defined in regulation 2(1)(e) of the IFSC Authority (Finance Company) Regulations, 2021 and that meets the prescribed conditions and activities.
Where is the term ‘permanent establishment’ defined for the purposes of Section 177?
The term ‘permanent establishment’ is defined in Section 173(c) of the Income Tax Act, 2025.
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