Section 25 of the Income-tax Act, 1961 specifies when interest payable outside India cannot be deducted in computing income under the head Income from house property. The rule operates notwithstanding the interest deduction otherwise available under Section 24.
Meaning and scope of Section 25
The section prevents a house-property interest deduction in a defined cross-border payment situation. It does not disallow every interest payment to a non-resident or every home loan from a foreign lender. The actual payee, place where interest is payable, withholding obligations, agent provisions and evidence of compliance all matter.
When is interest not deductible?
- Interest is payable outside India: determine the legal and factual place of payment under the borrowing arrangement.
- Tax compliance is absent: tax chargeable under the Act has not been paid or deducted under the applicable provisions of Chapter XVII-B.
- No Indian agent: there is no person in India who may be treated as an agent under Section 163.
- Historical exception: the provision excludes interest on a loan issued for public subscription before 1 April 1938.
Read these requirements together and consider whether the interest is chargeable to tax in India, including the effect of an applicable double taxation avoidance agreement. A contractual foreign payment by itself does not automatically trigger disallowance.
Relevant provisions and definitions
| Provision | Purpose |
|---|---|
| Section 22 | Charges annual value of qualifying buildings and appurtenant land to tax as house-property income. |
| Section 23 | Determines annual value, including relevant rules for let-out and self-occupied properties. |
| Section 24(b) | Permits qualifying interest on borrowed capital, subject to limits and conditions. |
| Section 25 | Overrides Section 24 for specified foreign-payable interest where statutory compliance conditions are not met. |
| Chapter XVII-B, including Section 195 where applicable | Contains tax deduction at source provisions, including rules relevant to payments to non-residents. |
| Section 163 | Defines persons who may be treated as agents in relation to non-residents. |
Illustrative examples
Example 1: Interest payable abroad without required compliance
An owner claims Rs. 3,20,000 as interest on borrowed capital for a let-out property. Suppose Rs. 1,00,000 of that interest is payable outside India, is subject to the relevant Indian tax obligation, no tax is paid or deducted under Chapter XVII-B, and no Indian agent under Section 163 exists. On those assumed facts, Section 25 bars deduction of the Rs. 1,00,000 component. The remaining interest must independently satisfy Section 24 and other applicable rules.
Example 2: Tax compliance satisfied
Assume the same Rs. 1,00,000 interest payable abroad, but the applicable tax has been properly deducted and remitted. The specific non-deduction rule in Section 25 would not apply on the ground of failure to deduct or pay tax; the taxpayer must still establish eligibility under Section 24. This is an illustration, not a conclusion that all foreign interest is taxable in India.
Practical documentation checklist
- Loan agreement and interest certificate or amortisation statement.
- Details of the lender, tax residency and payment destination.
- Assessment of chargeability to tax in India and treaty eligibility where relevant.
- Applicable withholding-tax calculations, challans, TDS returns and certificates, if required.
- Evidence relevant to any person who may be treated as an Indian agent under Section 163.
- Property ownership and evidence that the borrowing qualifies for deduction under Section 24.
Cross-border interest payments may involve additional procedural rules and reporting obligations. Obtain transaction-specific professional advice before claiming a deduction or deciding that withholding is unnecessary.
Income-tax Act, 2025 and the transition
The Income-tax Act, 2025 took effect on 1 April 2026. For tax years governed by the new Act, consult the corresponding provisions in the enacted legislation and the applicable rules rather than assuming that the numbering of the 1961 Act remains unchanged. This article explains the text and operation of Section 25 of the 1961 Act, including its relevance to earlier years and proceedings.
Official legal and tax resources
- Income Tax Department: Income-tax Act, 1961
- Income Tax Department: e-Filing portal
- India Code: official central legislation database
- Gazette of India: statutory notifications and legislation
Frequently asked questions
What does Section 25 disallow?
Section 25 restricts deduction of interest payable outside India when tax has not been paid or deducted under Chapter XVII-B and no person in India may be treated as an agent under Section 163, subject to the statutory exception.
Does Section 25 apply to all home loan interest?
No. It addresses the specified foreign-payable interest and compliance conditions, not every domestic or foreign home loan.
Can interest paid abroad be deducted if applicable tax is deducted?
Section 25 does not impose this particular disallowance where the statutory tax-payment or deduction requirement is satisfied; other conditions under Section 24 and applicable law still matter.
Does Section 25 override Section 24?
Yes. Its opening words expressly override Section 24 for interest falling within Section 25.
What is the exception for old public subscription loans?
The statutory wording excludes interest on a loan issued for public subscription before 1 April 1938 from this specific rule.
Original Section 25 text and amendment note
The original statutory wording and historical amendment note supplied with this page are retained below for reference. Check official legislation for the law applicable to a particular year.
Read original provision and legislative note
Notwithstanding anything contained in section 24, any 1*** interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938), on which tax has not been paid or deducted under Chapter XVII-B and in respect of which there is no person in India who may be treated as an agent under section 163 shall not be deducted in computing the income chargeable under the head "Income from house property".
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1. The words "annual
charge or" omitted by Act 14 of 2001, s. 16 (w.e.f. 1-4-2002).
General legal information only. The relevant assessment year, facts and current official law determine the result.