Amounts not deductible in certain circumstances
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Irrespective of any other provision of Chapter IV-D, the following amounts shall not be allowed as deduction in computing the income chargeable under the head “Profits and gains of business or profession”:—
- (a) any amount on account of––
- (i) tax paid on income; or
- (ii) tax paid by employer referred to in Schedule III (Table: Sl. No. 10); or
- (iii) tax paid in any other country for which relief is eligible under section 159 or 160,
- and shall include any surcharge or cess on such tax, by whatever name called;
- (b)(i) 30% of any sum payable to a resident on which tax is deductible at source under Chapter XIX-B and during the tax year, such tax has not been deducted or after deduction, has not been paid up to the due date specified in section 263(1), where—
- (A) tax is deducted and paid during any subsequent tax year, deduction of such sum shall be allowed as a deduction in computing the income in any subsequent tax year, in which such tax has been paid;
- (B) the assessee is required to and fails to deduct whole or any part of the tax under Chapter XIX-B but he is not deemed to be an assessee in default under section 398(2), then for the purposes of this sub-clause, the assessee shall be deemed to have deducted and paid the tax on such sum on the date on which the return has been filed by the payee referred to in section 398(2);
- (ii) any interest, royalty, fees for technical services or other sum chargeable under this Act which is payable––
- (A) outside India; or
- (B) in India to a non-resident (which is not a company) or to a foreign company, on which tax is deductible at source under Chapter XIX-B and during the tax year, such tax, has not been deducted or after deduction, has not been paid up to the due date specified in section 263(1), where––
- (I) tax is deducted and paid during any subsequent tax year, deduction of such sum shall be allowed as a deduction in computing the income in any subsequent tax year, in which such tax has been paid;
- (II) the assessee is required to and fails to deduct whole or any part of the tax under Chapter XIX-B but he is not deemed to be an assessee in default under section 398(2), then for the purposes of this sub-clause the assessee shall be deemed to have deducted and paid the tax on such sum on the date on which the return has been filed by the payee as referred to in section 398(2);
- (iii) any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source under Chapter XIX-B from any payments made from the fund which are chargeable to tax under the head “Salaries”;
- (c) any payment chargeable under the head “Salaries”, payable outside India or to a non-resident on which tax is deductible at source under Chapter XIX-B and such tax has not been deducted or, after deduction, has not been paid;
- (d)(i) any consideration paid or payable to a non-resident for a specified service on which equalisation levy is deductible under Chapter VIII of the Finance Act, 2016 and such levy has not been deducted or, after deduction, has not been paid up to the due date specified in section 263(1);
- (ii) deduction of such consideration shall be allowed in any subsequent tax year, in which such levy has been paid;
- (e) any amount––
- (i) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or
- (ii) which is appropriated, directly or indirectly, from a State Government undertaking, by the State Government;
- (f) the expenditure incurred by a firm, assessable as such––
- (i) in the nature of salary, bonus, commission or remuneration, by whatever name called (herein referred as remuneration) to a partner, who is not a working partner; or
- (ii) on the remuneration to a working partner and interest to any partner, if it is––
- (A) not authorised by the partnership deed applicable for the period for which such remuneration or interest is paid; or
- (B) authorised by and is as per the terms of partnership deed but relates to the period prior to the date of such partnership deed, or which was not authorised by the earlier partnership deed; or
- (iii) on the aggregate remuneration to all working partners as authorised by the partnership deed, exceeding the amount computed as under:––
- (A) on the first six lakh rupees of the book profit or in case of a loss, three lakh rupees or 90% of the book profit, whichever is higher;
- (B) on the balance of the book profit at the rate of 60%; or
- (iv) on interest to any partner as authorised by the partnership deed, exceeding 12% simple interest per annum, and where an individual is a partner in a firm, on behalf of or for the benefit of any other person, such partner and any other person shall be referred as a “representative partner” and the “person so represented”, respectively, then the provisions of sub-clause (ii) and this sub-clause––
- (A) shall not be applicable in respect of interest paid to such individual not as a representative partner;
- (B) shall be applicable in respect of interest paid to an individual as a representative partner and the person so represented;
- (C) shall not be applicable in respect of interest paid to a partner, otherwise than as a representative partner, on behalf of or for the benefit of any other person; or
- (v) In this clause––
- (A) “book profit” means the net profit, as shown in the profit and loss account for the relevant tax year, computed as per Chapter IV-D as increased by the aggregate amount of the remuneration to all the partners of the firm, if such amount has been deducted while computing the net profit;
- (B) “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;
- (g) the expenditure incurred by an association of persons or a body of individuals (other than a company, or a co-operative society or society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India)––
- (i) in the nature of interest, salary, bonus, commission or remuneration, by whatever name called, made to a member of such association or body;
- (ii) where the interest has been paid by the association or the body to its member and such member has also paid interest to the association or the body, then only such excess interest, if any, paid by the association or body shall not be allowed under sub-clause (i);
- (iii) where an individual is a member of an association or a body on behalf, or for benefit of any other person, such member and any other person shall be referred as “representative member” and “person so represented”, respectively, then, the provisions of this clause––
- (A) shall not be applicable in respect of interest paid to or received from such individual not being a representative member;
- (B) shall be applicable in respect of interest paid to or received from an individual as a representative member and the person so represented;
- (C) shall not be applicable in respect of interest paid to a member, otherwise than as representative member, on behalf or for the benefit of any other person.
FAQs on Section 35 of Income Tax Act 2025:
1. What types of taxes are not allowed as deductions under Section 35?
Any income tax, employer-paid tax (as per Schedule III), foreign tax eligible for relief under Sections 159 or 160, and any surcharge or cess on such taxes are not deductible.
2. Can income tax paid in a foreign country be claimed as a deduction?
No, if relief is available under Section 159 or 160, such foreign taxes (including surcharge or cess) are not deductible.
3. What happens if TDS is not deducted or not paid on payments to residents?
30% of such expenditure is disallowed unless TDS is later deducted and paid. Then, the amount becomes deductible in the year of payment.
4. Is disallowance applicable if the payer is not deemed an assessee-in-default under Section 398(2)?
No. If not deemed in default (because the payee filed return and paid tax), the payer is treated as having deducted and paid TDS on return filing date.
5. What is the treatment for TDS defaults on payments to non-residents?
Similar to residents—expenditure is disallowed if TDS is not paid by the due date under Section 263(1), but allowed in later years when paid.
6. Are deductions allowed if tax is eventually paid on technical services or royalty to non-residents?
Yes, deductions will be allowed in the tax year in which the tax is actually paid.
7. Is salary paid outside India to a non-resident allowed as a deduction if TDS is not paid?
No. Such salary is disallowed if TDS is not deducted or deposited.
8. Can an employer claim deduction for contributions to an employee provident fund?
Only if the employer ensures TDS is made from payments taxable under the head “Salaries” from the fund.
9. What happens if equalisation levy is not paid on specified services to non-residents?
The expense is disallowed until the levy is paid. Deduction will be permitted in the year of payment.
10. Are charges levied or appropriated by State Governments on undertakings deductible?
No, if the charges are levied or appropriated exclusively by the State Government, they are not allowed as a deduction.
11. Is remuneration to non-working partners deductible?
No. Remuneration to non-working partners is not allowed.
12. What if the remuneration to working partners exceeds the limits specified in the partnership deed?
Only the permissible limits are deductible. The excess is disallowed.
13. Is interest on capital to partners deductible beyond 12%?
No. Interest beyond 12% per annum is disallowed, even if authorised by the deed.
14. Can retrospective authorisation in a partnership deed validate payments?
No. Payments must be authorised in a deed applicable during the relevant period—not retrospectively.
15. Are salary or interest payments to members of AOPs/BOIs allowed?
No, such payments are disallowed, except in specific conditions involving excess interest.
16. What if a member of an AOP acts on behalf of another person?
Then provisions apply based on whether the payment is to a representative member or the person represented.
Section 35 disallows specific expenses from being claimed as deductions under “Profits and gains of business or profession.” These include unpaid TDS on payments to residents or non-residents, tax-related payments, non-compliant salary or partner remuneration, and certain levies or appropriations.
The section ensures tax compliance and discourages artificial expense claims, particularly in relation to TDS, equalisation levy, and intra-group or related party payments. It emphasizes timely deduction and deposit of taxes and proper documentation to secure deductions.
