Section 94B of the Income-tax Act: Limitation on Interest Deduction
Section 94B of the Income-tax Act, 1961 introduced India's thin capitalisation restriction on excessive interest deductions arising from specified non-resident associated-enterprise debt. Its corresponding provision under the Income-tax Act, 2025 is Section 177.
1. Section 94B(1): When the interest limitation applies
The restriction generally concerns an Indian company or the permanent establishment in India of a foreign company that incurs deductible interest or similar expenditure exceeding Rs. 1 crore in respect of debt issued by a non-resident associated enterprise. The relevant expenditure must be deductible under the head "Profits and gains of business or profession" before the statutory limitation is considered.
A loan from an unrelated lender can also be treated as associated-enterprise debt where an associated enterprise provides an implicit or explicit guarantee to that lender, or deposits corresponding and matching funds with it. This prevents the restriction being avoided merely by interposing an independent lender.
2. Section 94B(2): Excess interest and the 30% EBITDA rule
EBITDA means earnings before interest, taxes, depreciation and amortisation. For the purposes of Section 94B, excess interest is the lower of (a) total interest paid or payable in excess of 30% of the borrower's EBITDA for the relevant previous year, and (b) interest paid or payable to associated enterprises for that year.
| Illustrative calculation | Amount |
|---|---|
| EBITDA | Rs. 10 crore |
| 30% of EBITDA | Rs. 3 crore |
| Total interest expense | Rs. 5 crore |
| Interest to associated enterprises | Rs. 4 crore |
| Excess of total interest over 30% EBITDA | Rs. 2 crore |
| Excess interest restricted (lower of Rs. 2 crore and Rs. 4 crore) | Rs. 2 crore |
This is a simplified illustration assuming the scope and threshold tests are met, no exception applies, and all figures are otherwise deductible. The restriction is not a blanket disallowance of every payment to a foreign associated enterprise.
3. Section 94B(1A) and (3): Statutory exclusions
The updated provision excludes interest on debt issued by a lender that is an Indian permanent establishment of a non-resident engaged in banking. The borrower-side exceptions cover qualifying Indian companies or Indian permanent establishments engaged in banking or insurance, qualifying Finance Companies located in an International Financial Services Centre (IFSC), and notified classes of non-banking financial companies. These exclusions are subject to the precise statutory wording, applicable notifications and prescribed conditions; they do not extend automatically to every financial services business.
The IFSC Finance Company provisions were introduced by the Finance (No. 2) Act, 2024 with effect from 1 April 2025. The prescribed conditions under the applicable income-tax rules should also be checked.
4. Section 94B(4): Carry-forward of restricted interest
Interest expenditure not wholly deductible under the section may be carried forward and claimed against eligible business or professional profits, subject to the statutory maximum deduction in the later year. Under the 1961 Act, this carry-forward cannot exceed eight assessment years immediately following the assessment year in which the excess interest was first computed.
5. Section 94B(5): Important definitions
Associated enterprise
The term refers to the relationship defined in Section 92A of the Income-tax Act, 1961, including the specified participation in management, control or capital and deemed associated-enterprise relationships.
Debt
Debt includes loans, financial instruments, finance leases, financial derivatives and other arrangements giving rise to deductible interest, discounts or similar finance charges.
Permanent establishment
A permanent establishment includes a fixed place of business through which an enterprise's business is wholly or partly carried on.
Non-banking financial company and IFSC Finance Company
For the earlier law, the NBFC definition is cross-referenced to Section 36(1)(viia). A qualifying IFSC Finance Company must satisfy the applicable definition and prescribed conditions, including the relevant IFSC regulatory framework.
6. Section 177 of the Income-tax Act, 2025
Section 177 reorganises the interest-limitation provision for the new tax-year framework. Its principal elements include the Rs. 1 crore threshold, non-resident associated-enterprise debt and deemed debt through guarantees or matching deposits, the 30% EBITDA restriction, statutory exclusions and an eight-tax-year carry-forward ceiling.
| Subject | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Limitation on interest deduction | Section 94B | Section 177 |
| Period terminology | Previous year / assessment year | Tax year |
| Excess-interest computation | Section 94B(2) | Section 177(4) |
| Carry-forward | Section 94B(4) | Section 177(5) and (6) |
| Definitions | Section 94B(5) | Section 177(7) |
7. Practical compliance checklist
- Identify the applicable tax year and statutory regime.
- Verify whether the borrower and non-resident lender are associated enterprises, including deemed relationships through guarantees or matching deposits.
- Reconcile total deductible interest, associated-enterprise interest and EBITDA with the accounts and tax computation.
- Check whether the Rs. 1 crore threshold is crossed and whether a specific statutory exclusion applies.
- Maintain loan agreements, guarantee documents, financing calculations and supporting transfer-pricing records where required.
- Track restricted interest by year and monitor the eight-year carry-forward expiry.
8. Frequently asked questions
What is the limit under Section 94B?
When the statutory conditions and Rs. 1 crore threshold are met, excess interest is limited by reference to 30% of EBITDA and the interest paid or payable to associated enterprises.
Can disallowed interest be carried forward?
Yes. Eligible excess interest can be carried forward for up to eight succeeding assessment years under the 1961 Act, subject to the deduction limit in each year.
What is the provision under the Income-tax Act, 2025?
Section 177 addresses limitation on interest deduction for relevant tax years beginning on or after 1 April 2026.
9. Official legislation and reference material
- Income Tax Department: Section 94B of the Income-tax Act, 1961
- Income Tax Department: Income-tax Act, 1961 as amended by Finance Act, 2025 (PDF)
- Finance (No. 2) Act, 2024: amendments concerning IFSC Finance Companies (PDF)
- CBDT Notification No. 10/2025: related prescribed conditions (PDF)
- Income Tax Department: current statutes, rules and notifications
This article explains the statutory framework for general information. Applicability depends on the facts, relevant tax year, amendments, notifications and prescribed conditions.