Other Deductions AY 2026-27

Other Deductions

Introduction

Section 36 allows deductions for various revenue expenses incurred during business or professional operations, provided specific conditions are met.

List of Key Deductions

1. Insurance Premium [Section 36(1)(i)/(ia)/(ib)]: For damage or destruction of stock or stores, on the life of cattle (paid by the federal milk co-operative society), or employees’ health (paid by other than cash).
2. Bonus or Commission [Section 36(1)(ii)]: Paid to employees if it would not otherwise have been payable to them as profit or dividend.
3. Interest on Borrowed Capital [Section 36(1)(iii)]: Interest on borrowings taken for operational activities or to acquire an asset, pertaining to the period after such asset is put to use, shall be allowed.
4. Discount on Zero-Coupon Bonds [Section 36(1)(iiia)]: Deductible on a pro-rata basis (refer to Rule 8C) over the bond’s life. Discount on zero-coupon bonds = Amount payable on maturity/redemption – Money realised on issue.
5. Employer Contributions [Section 36(1)(iv)/(iva)/(v)]:

• Employer’s contribution to PF or superannuation fund is deductible, but limited to 27% of the employee’s salary.
• Employer’s NPS contribution is deductible, restricted to the lower of actual contribution or 14% of employee’s salary.
• Employer’s contribution to an approved gratuity fund (irrevocable trust) is deductible, subject to:
• Annual contribution ≤ 8.33% of each employee’s salary, and
• Initial contribution for past service is ≤ 8.33% of salary per year of past service.
  6. Employees’ Contributions [Section 36(1)(va)]: Employee contributions (PF/ESI) received by the employer are treated as the employer’s income, but a deduction is allowed only if deposited in the respective fund by the statutory due date of the relevant fund.
  7. Loss of Animals [Section 36(1)(vi)]: For animals (other than as stock-in-trade) used in business, deductible upon death or permanent disability. Deductible amount = Actual cost of animals – Amount realised from carcasses or sale.
  8. Bad Debts [Section 36(1)(vii)]: Deductible in the year in which written off as irrecoverable in the accounts.
• For the assessee to which Section 36(1)(viia) applies, deduction for bad debts is allowed only to the extent it exceeds the credit balance in the provision for bad and doubtful debts account made.
• If a debt, not recorded in the accounts due to any ICDS, becomes irrecoverable, it will be allowed as a deduction in that year, and it shall be deemed that such debt has been written off as irrecoverable in the accounts.
• The debt must have been included in the total income of the assessee or represent money lent in the ordinary course of banking or money-lending.
• In case of partial recovery, deficiency is deductible in the year of final settlement.
  9. Provision for Bad Debts [Section 36(1)(viia)]: Allowed for banks, financial institutions and NBFCs. Deductible amount = Lower of provision made by assessee or % of total income/% of average rural advances (for banks).
  10. Transfer to Special Reserve [Section 36(1)(viii)]: Allowed for banks, housing finance companies and financial institutions up to 20% of eligible business profits. No further deduction is allowed if the amount of such reserve exceeds 200% of the paid-up share capital and general reserves.
  11. Family Planning Expenses [Section 36(1)(ix)]:
• Revenue expenditure: incurred by a company on promoting family planning among employees is deductible in the year of incurrence.
• Capital expenditure: Deductible in five equal instalments commencing from the year in which such expenditure is incurred. 1/5th of capital expenditure is deductible to the extent of business profits; the unabsorbed amount is carried forward like depreciation.
• If a family planning asset is sold without use for any other purposes, taxable business income = lower of (a) sale proceeds, or (b) deduction already claimed.
• If a family planning asset is later used for other business purposes, its depreciation cost = actual cost – deduction already claimed under this provision.
  12. Revenue Expenditure by Statutory Corporations [Section 36(1)(xii)]: Revenue expenditure incurred by a notified statutory entity for purposes authorised by its Act is fully deductible.
  13. Banking Cash Transaction Tax [Section 36(1)(xiii)]: Any Banking Cash Transaction Tax paid by the assessee on taxable banking transactions is allowable as a deduction.
  14. Credit Guarantee Trust Fund Contributions [Section 36(1)(xiv)]: A public financial institution can claim a deduction for contributions made to a notified Credit Guarantee Fund Trust for Small Industries.
  15. Securities/Commodities Transaction Tax [Section 36(1)(xv)/(xvi)]: STT/CTT paid on taxable securities/commodities transactions is deductible if such income is included under “Profits and gains of business or profession”.
  16. Purchase of Sugarcane [Section 36(1)(xvii)]: A sugar manufacturing co-operative society can claim a deduction for sugarcane purchase, limited to the lower of the actual purchase price or the Government-fixed/approved price.
  17. Marked-to-Market Loss [Section 36(1)(xviii)]: As per ICDS-VIII, listed securities held as stock-in-trade are valued at the lower of cost or NRV; any resulting loss is deductible.

 

General Deductions for Business Expenditures

 

Introduction

Section 37 provides a residual deduction for revenue expenditures incurred wholly and exclusively for business or profession, not covered under Sections 30 to 36, and not prohibited by law.

Conditions for Allowability

• Not Covered by Sections 30 to 36.
• Not a Capital or Personal Expenditure:
  • Capital expenditures are non-deductible unless specified otherwise.
  • Personal expenses are excluded.
• Wholly and Exclusively for Business:
  • Expenditure must serve a commercial purpose, determined from a business perspective.

Specifically Disallowed Expenditures

• Expenditure for any offence or activity prohibited by law, which includes expenditures:
• For any purpose that is an offence or prohibited by law, in India or outside India.
• On providing any benefit/perquisite that violates any law, rules, regulations or guidelines governing the recipient.
• To compound an offence under any law, in India or outside India.
• To settle proceedings for contravention of any law notified by the Central Government. The following laws are notified: [Notification No. 38/2025, dated 23-04-2025]
• Securities and Exchange Board of India Act, 1992;
• Securities Contracts (Regulation) Act, 1956;
• Depositories Act, 1996;
• Competition Act, 2002.
• Expenditure incurred on advertisement in any souvenir, brochure, tract, pamphlet or similar material published by a political party.

 

Disallowance of Expenses

 

Introduction

Certain expenses are disallowed, wholly or partly, while computing taxable income if specific conditions are not met.

Disallowance Categories

Default in payment of TDS [Section 40(a)(i)/(ia)/(iii)]

• Payment outside India or in India to non-residents, for expenses like interest, royalty, FTS, etc., for which TDS was not deducted or deducted but not deposited by the due date of return filing. 100% of the expenditure is disallowed. Such expenditure is deductible in the year in which tax is deducted and deposited or deposited with the Central Government.
• Payment to residents for which TDS was not deducted or deducted but not deposited by the due date of return filing. 30% of the expenditure is disallowed. Such expenditure is deductible in the year in which tax is deducted and deposited or deposited with the Central Government.
• Salary paid outside India or in India to a non-resident for which TDS was not deducted or deducted but not deposited. 100% of the expenditure is disallowed.
• If the payer has not deducted TDS fully or partly, but is not treated as assessee-in-defaultbecause:
  • The payee has included the above income in his return of income.
  • He has paid the tax due on the income declared in such return of income, and
  • The payer obtains a certificate to this effect from a Chartered Accountant in Form No. 26A and submits it electronically,

then it will be assumed that the payer has deducted and paid the TDS on the date when the payee filed their return of income.

Default in payment of equalisation levy [Section 40(a)(ib)]

• Expenses for which the levy was not deducted or deducted but not deposited with the Government by the due date of return filing.
• Such expenditure is deductible in the year in which the levy is deducted and deposited.
• However, the equalisation levy shall not be charged on payments made on or after 01-04-2025.

Tax payment [Section 40(a)(ii)]

• Payment of income tax, surcharge, and education cess,
• Taxes paid outside India, which are eligible for relief under Sections 90, 90A or 91.

Royalty or license fee levied on the State Govt. undertaking [Section 40(a)(iib)]

• Any payment by way of royalty, licence fee, service fee, privilege fee, service charges, or any other fee/charges levied exclusively on or any amount appropriated from a State Govt. undertaking by the State Govt.

Employer’s contribution to PF [Section 40(a)(iv)]

• Employer’s contribution to PF or other employee funds if no proper TDS arrangement is made under Section 192A (or other relevant section) on taxable payments made from the fund, which are taxable as salary.

Tax paid on non-monetary perquisites [Section 40(a)(v)]

• Taxes paid by the employer on non-monetary perquisites provided to its employees.

Payment made to the partners [Sections 40(b)]

• Remuneration payment (such as salary, bonus, commission, or remuneration) made to partners by a partnership firm is deductible only if authorised by the partnership deed and paid to the working partner, subject to the following:
  • Interest on capital is deductible only up to 12% per annum. Interest payment in excess of 12% per annum shall be disallowed.
  • If a partner represents someone else, interest paid to him in his personal capacityis not hit by the 12% cap. Similarly, if he is a partner in his individual capacity, interest received on behalf of another person is outside Section 40(b). However, if the amount is excessive, it may still be disallowed under Section 40A(2).
  • Deduction for partner’s remuneration shall be limited to the following:
• In case of negative book profit (loss) – Rs. 3,00,000
• On the first Rs. 6,00,000 of book profit – Higher of Rs. 3,00,000 or 90% of book profit
• On balance of book profit – 60% of book profit
• Book Profit = Net Profit (including adjustments) + Remuneration already debited
• Interest paid in excess of 12% shall be added back while computing the book profit.

Payment made to the members of AOP/BOI [Sections 40(ba)]

• Payments by an AOP/BOI to its members as salary, bonus, commission, remuneration, or interest. For interest, only the net amount paid (after adjusting interest recovered) is disallowed.
• If a person is a member of an AOP/BOI as a representative of someone else, interest paid to him in his personal capacity won’t be disallowed. Likewise, if a person is a member in his personal capacity, interest paid to him on behalf of another person won’t be disallowed.

Payment made to related parties [Section 40A(2)]

• Expenditure paid to specified persons is disallowed to the extent it is excessive or unreasonable compared to the fair market value of goods/services/facilities, legitimate business needs, or benefit derived.
• Specified person means where the assessee is:
  • an individual
• Persons in whose business the individual or his relative has a substantial interest.
  • a HUF
• Family members, their relatives.
• Persons in whose business the HUF, its members, or their relatives have a substantial interest.
  • a Company
• Directors, relatives of directors.
• Persons in whose business the company, its directors, or their relatives have a substantial interest
  • a partnership firm
• Partners, relatives of partners.
• Persons in whose business the firm, its partners, or their relatives have a substantial interest.
  • an AOP/BOI
• Members, their relatives.
• Persons in whose business the AOP/BOI, its members, or their relatives have a substantial interest.
  • It also includes:
• an individual who has a substantial interest in the business of the assessee and a relative of such individual.
• a company which has a substantial interest in the business of the assessee, any director of such company, any relative of such director, and any other company in which such company has a substantial interest.
• a Firm, AOP, or HUF that has a substantial interest in the business of the assessee, partner or member of such person and any relative of such partner or member.
• a company, one of whose directors has a substantial interest in the business of the assessee, any director of such company and any relative of such director.
• a Firm or AOP or HUF, one of whose partners/members has a substantial interest in the business of the assessee, any partner or member of such person, and any relative of such partner or member.

• A person is deemed to have a substantial interest in the business or profession if such person is the beneficial owner of at least:
  • 20% shares (not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits) at any time during the relevant previous year, if a business or profession is carried on by a company; and
  • 20% of profits at any time during the previous year, if the business or profession is carried on by any other person.

Payment made in cash [Section 40A(3)/(3A)]

• If payment or aggregate of payment to a person in a day exceeds 10,000 (Rs. 35,000 for goods carriages) and it is made other than by account payee cheque, bank draft, electronic clearing system, or prescribed electronic modes.
• If expenditure was claimed earlier and repaid in non-specified modes exceeding 10,000, it is treated as business income in the year of repayment.
• Disallowance is not made for the following payments: [ Rule 6DD ]
  • Payment to specified institutions like RBI, banks, LIC, co-operative banks, etc.
  • Payment for an expenditure which is required to be made to the Government in legal tender.
  • Payment by specified modes like letter of credit arrangement via bank, mail/telegraphic transfer via bank, book adjustment of bank accounts, bill of exchange payable to bank.
  • Payment is adjusted against the payee’s liability for goods or services provided by the assessee.
  • Payment made to cultivator, grower, or producer for purchase of agriculture or forest produce, produce of animal husbandry or dairy or poultry farming, fish or fish products, or products of horticulture or apiculture.
  • Payment made to a producer for the purchase of a product manufactured/processed without the aid of power in a cottage industry.
  • Payment made in a village/town without a banking facility, to a resident of such village/town or a person carrying on business/profession there.
  • Payment made to employees or their heirs by way of gratuity, retrenchment compensation, or similar terminal benefit if the aggregate of such sum does not exceed 50,000.
  • Salary paid (after TDS under Section 192) to an employee who is temporarily posted for ≥ 15 days at a place/ship other than normal duty and has no bank account at that place/ship.
  • Payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.
  • Payment made by an authorised dealer or a money changer for the purchase of foreign currency or a traveller’s cheque in the normal course of his business.

Provision for gratuity [Section 40A(7)]

• Any provision made for gratuity payment to employees on their retirement or termination, except: provision made for payment of gratuity by way of contribution to an approved gratuity fund, or provision for payment of gratuity that has become payable during the previous year.
• If the provision of gratuity payment was already allowed earlier, no deduction will be allowed again on the actual payment out of such provision.

Contributions to non-statutory funds [Section 40A(9)]

• Any sum paid by an employer to create or contribution to any fund, trust, company, AOP, BOI, registered society, or other institution for any purpose, except where such sum is paid to a recognised PF, approved superannuation/pension scheme, or approved gratuity fund up to limits permitted under income-tax law or it is compulsory under any other law.

Marked-to-market loss [Section 40A(13)]

• Any marked-to-market loss or other expected loss except as allowed under Section 36(1)(xviii).

 

Disallowance for TDS Default

 

Introduction
Expenditure is disallowed if tax is not deducted or, after deduction, not deposited with the Central Government in accordance with Chapter XVII-B. Such expenditure is allowable in the year in which the tax is duly deducted and deposited.

Disallowance from Payment Made to Non-Resident [Section 40(a)(i)]

Disallowance applies where tax is not deducted or not deposited by the due date for filing the return in respect of payments, including interest, royalty, technical fees or any other sum (other than salary), payable outside India or in India to a non-resident or foreign company, where such sum is chargeable to tax in India.

If salary is paid outside India or to a non-resident and tax is not paid or deducted, disallowance is made under Section 40(a)(iii).

The provision applies where tax is not deducted under Sections 194B, 194BA, 194BB, 194E, 194G, 194LB, 194LBA, 194LBB, 194LBC, 194LC, 194LD, 194T, 195, 196A , 196B , 196C or 196D .

Amount disallowed: 100% of the expenditure.

Expenditure allowed subsequently:

• If disallowed for non-deduction, it is allowed in the year in which tax is deducted and deposited.
• If disallowed for late deposit, it is allowed in the year in which tax is deposited.

No disallowance is made where the deductee has filed return of income, included the amount in income, paid due tax, and the payer furnishes Form No. 26A electronically.

Disallowance from Payment Made to Resident [Section 40(a)(ia)]

Disallowance applies where tax is not deducted or not deposited from sums payable to a resident and where such expenditure is claimed under the head Profits and gains of business or profession or Income from other sources.

The provision applies where tax is not deducted under Sections 192, 193 , 194A , 194B , 194BA , 194BB , 194C , 194D , 194DA , 194EE , 194F , 194G , 194H , 194-I , 194-IA , 194-IB , 194-IC , 194J , 194K , 194LA , 194LBA , 194LBB , 194LBC , 194M , 194-O , 194P , 194Q , 194R , 194S or 194T .

Amount disallowed: 30% of the expenditure.

Exception: No disallowance if the deductee has filed return, included the income, paid tax, and the payer furnishes Form No. 26A electronically.

Expenditure allowed subsequently:

• If disallowed for non-deduction, it is allowed in the year in which tax is deducted and deposited.
• If disallowed for late deposit, it is allowed in the year in which tax is deposited.

Disallowance from Payment of Salary to Non-Resident [Section 40(a)(iii)]

Salary payable outside India to any person or salary payable in India to a non-resident is not allowable as deduction if tax has not been paid or deducted. If the assessee deposits the tax on such salary, no disallowance arises under this section, though tax paid by the assessee is disallowed under Section 40(a)(ii).

If tax is not deducted from salary paid in India to a resident, disallowance is governed by Section 40(a)(ia).

 

Disallowance of payment made to related persons

 

Introduction

Excessive payment made or is to be made to the related parties in respect of an expenditure shall be disallowed to the extent such expenditure is considered excessive or unreasonable. The object of this provision is to check evasion of tax through excessive or unreasonable payments to relatives and other specified persons.

When disallowance is made?

Where assessee incurs any expenditure, in respect of which payment has been or is to be made to the specified persons, it shall be disallowed to the extent it is considered excessive or unreasonable having regard to the following:

• Fair market value of goods, or services or facilities
• Legitimate needs of the business of the assessee
• Benefit derived by or accruing to assessee as a result of the expenditure.

The onus is on the Assessing Officer to bring the material on record to prove that the payment made by the assessee is excessive or unreasonable having regard to the criterion referred to above.

Exception

No expenditure in a transaction, being a specified domestic transaction incurred for an assessment year commencing on or before April 01, 2016, shall be disallowed by treating it as excessive or unreasonable having regard to its fair market value, if it is at its arm length price as defined under section 92F (ii).

However, expenditure shall be disallowed for any transaction made on or after the assessment year 2017-18, if it is deemed as excessive or unreasonable having regard to its fair market value, even if it is at its arm’s length price as defined under section 92F (ii).

Specified Persons

The specified persons for various types of assessee are discussed as below:

Who has incurred the expenditure?	Specified persons to whom payment has been made
1. An Individual	a) Any relative of such individual b) To a person in whose business the individual or any of his relative has a substantial interest
2. A Company	a) Director of the Company b) Any relative of the director c) To a person in whose business the company or any of its directors or relative of such directors has a substantial interest.
3. A Firm	a) Partner of the firm b) Any relative of the partner c) To a person in whose business the firm or any of its partners or relative of such partners has a substantial interest.
4. AOP/BOI	a) Members of the AOP/BOI b) Any relative of the members c) To a person in whose business the AOP/BOI or any of its members or relative of such members has a substantial interest.
5. A HUF	a) To a member of the family b) Any relative of the members c) To a person in whose business the HUF or any of its members or relative of such members has a substantial interest.
6. Any other taxpayer	a) To an individual who has a substantial interest in business of taxpayer b) Any relative of such individual
7. Any other taxpayer	a) To a company which has a substantial interest in the business of the taxpayer b) Any director of such company c) Any relative of such director d) Any other company carrying on business or profession in which above mentioned company has a substantial interest
8. Any other taxpayer	a) To a Firm or AOP or HUF who has substantial interest in the business of the taxpayer b) Partner or member of such person c) Any relative of such partner or member
9. Any other taxpayer	a) To a company, one of whose directors has a substantial interest in the business of the taxpayer b) Any director of such company c) Any relative of such director
10. Any other taxpayer	a) To a Firm or AOP or HUF, one of whose partners/members has a substantial interest in the business of the taxpayer b) Any partner or member of such person c) Any relative of such partner or member

Meaning of ‘Relative’

The term ‘relative’ in relation to an individual shall include husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

Meaning of ‘Substantial Interest’

A person is deemed to have substantial interest in the business or profession if such person is the beneficial owner of at least:

• 20% share (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) at any time during the relevant previous year, if business or profession is carried on by a company
• 20% of profits at any time during the previous year, if business or profession is carried on by any other concern.

 

Disallowance of Cash Payments

 

Introduction
No deduction is allowed for any expenditure if payment exceeding Rs. 10,000 per day is made otherwise than by account payee cheque, account payee bank draft, electronic clearing system through a bank account, or prescribed electronic modes. For payments relating to plying, hiring or leasing goods carriages, the limit is Rs. 35,000. Certain exceptions are provided under Rule 6DD.

When Disallowance Is Made

Disallowance applies where:

• Payment or aggregate payments to a person in a day exceed Rs. 10,000 (or Rs. 35,000 for specified transport-related payments), and
• Payment is not made through permissible banking modes or prescribed electronic modes.

The disallowance operates only when both the expenditure and the payment exceed Rs. 10,000 in a day. Payments made through prescribed electronic modes are acceptable.

Loan repayments are not considered expenditure and are therefore not subject to disallowance, though repayment is subject to Section 269ST. Interest payments are covered by this disallowance provision.

Payments made by commission agents for goods sold on commission are not covered, but purchases on the agent’s own account are subject to these rules.

If an expenditure was allowed in an earlier year but later paid in cash exceeding the limit, the amount so paid is deemed business income in the year of payment. For transport-related businesses, the Rs. 35,000 limit applies.

Exceptions under Rule 6DD

Disallowance does not apply in the following cases:

Payment to specified institutions:

Payments to RBI, banking companies, SBI and subsidiaries, co-operative banks, land mortgage banks, Primary Agricultural Credit or Credit Societies, and LIC.

Payment to Government in legal tender:

Where payment must be made in legal tender.

Payments through specified modes:

Letter of credit, mail or telegraphic transfer, book adjustments between bank accounts, bill of exchange payable only to a bank, electronic clearing systems, and prescribed electronic modes. Bank includes foreign banks.

Payment by book adjustment:

Adjustment against liability for goods or services supplied by the assessee.

Payments for agricultural or animal produce:

Payments to cultivators, growers, or producers of agricultural produce, forest produce, produce of animal husbandry, dairy, poultry, fish or fish products, or products of horticulture or apiculture.
This applies only if payment is made to the actual producer and not to intermediaries.

Purchase of animals:

Payments to producers of livestock and meat are exempt subject to conditions including producer declarations and certification by a veterinary doctor.

Cottage industry products:

Payments to producers manufacturing or processing products without power in a cottage industry.

Terminal benefits to low-paid employees:

Payments of gratuity, retrenchment compensation or similar terminal benefits up to Rs. 50,000.

Salary at remote places:

Where salary is paid after TDS to an employee temporarily posted for at least 15 days at a place or ship where no bank account is maintained.

Authorized dealers and money changers:

Cash payments for purchase of foreign currency or traveller’s cheques in the ordinary course of business.

No dispute permitted:

Where payment is made through prescribed modes to avoid disallowance, no person may claim in any proceeding that payment was not made in cash or otherwise.

 

Deduction for Partner’s Remuneration

 

Introduction
A firm may claim deduction for remuneration or interest paid to its partners if such payments are authorised by the partnership deed, made only to working partners in case of remuneration, and within the statutory limits prescribed under Section 40(b).

When Deduction Is Allowed

Remuneration paid to working partners in the form of salary, bonus, commission or any other form is allowable as deduction only when:

• The partnership deed authorises such payment;
• The partner is a working partner, meaning an individual actively engaged in the conduct of business; and
• The amount does not exceed the limits prescribed under Section 40(b).

Remuneration to non-working partners is not allowable. The firm must demonstrate that the partner qualifies as a working partner.

Interest paid to partners is deductible only if authorised by the partnership deed and not exceeding 12% per annum. Any amendment to the deed has only prospective effect.

The partnership deed must specify the amount of remuneration or the method of quantifying it. If neither the amount nor the quantification mechanism is specified, remuneration cannot be allowed as deduction.

How Much Deduction Is Allowed

In case of remuneration

Deduction is restricted to the amount authorised in the partnership deed or the limits of Section 40(b), whichever is lower.

For assessment years up to 2024–25:

• Negative book profit: Rs. 1,50,000
• First Rs. 3,00,000 of book profit: Higher of Rs. 1,50,000 or 90% of book profit
• Balance book profit: 60% of such balance

From assessment year 2025–26:

• Negative book profit: Rs. 3,00,000
• First Rs. 6,00,000 of book profit: Higher of Rs. 3,00,000 or 90% of book profit
• Balance book profit: 60% of such balance

Book profit is computed by adjusting net profit for provisions under Sections 28 to 44DB and adding back partners’ remuneration debited to the profit and loss account. Unabsorbed depreciation is adjusted but brought-forward losses are not. Income chargeable under other heads is excluded. Interest exceeding 12% is added back. Deductions under Chapter VI-A are ignored.

In case of interest

Interest paid on partners’ capital is deductible only if authorised by the partnership deed and not exceeding 12% per annum. Interest in excess of this limit is disallowed. Interest paid to a partner in a representative capacity is treated based on whether it is received personally or on behalf of another person. Excessive interest may still be disallowed under Section 40A(2).

When Deduction Is Not Allowed

Deduction for remuneration or interest is not allowed if:

• The partnership deed does not specify the profit-sharing ratio;
• The firm fails to file the return, comply with notices under Sections 142(1) or 143(2), or comply with directions issued under Section 142(2A);
• Circumstances under Section 144 apply.
  Disallowance arises only in situations governed by Section 144.

Excessive Remuneration

If remuneration paid to partners is excessive or unreasonable having regard to fair market value, legitimate business needs or benefit derived, such amount may be disallowed under Section 40A(2).

 

Disallowance of Sum Paid to Members of AOP or BOI

 

Introduction
An Association of Persons (AOP) or Body of Individuals (BOI) is not allowed deduction for any salary, bonus, commission, remuneration or interest paid to its members. Other payments made to members, such as rent or consultancy fees, are allowable.

Disallowance for Remuneration and Interest

Any amount paid by an AOP or BOI to its members in the form of salary, bonus, commission, remuneration or interest is not allowable as deduction.

Exception: Member in Representative Capacity

If an individual is a member in an AOP or BOI on behalf of another person, interest paid to such member otherwise than in a representative capacity shall not be disallowed under this provision.
Similarly, where an individual is a member in a personal capacity, interest received on behalf of another person is not considered for disallowance.

Deduction Allowed for Other Payments

Payments made to members that are not in the nature of salary, bonus, commission, remuneration or interest are allowable as deduction.