Section 177 Income Tax Act 2025: When Is Interest Deduction Restricted?

Section 177 restricts deduction of excessive interest on specified cross-border debt involving non-resident associated enterprises. This guide explains who is covered, the 30% EBITDA ceiling, exceptions, and the eight-year carry-forward rule.

Current law: Section 177 of the Income-tax Act, 2025 applies from 1 April 2026. It broadly corresponds to Section 94B of the Income-tax Act, 1961. The limitation applies only where the statutory conditions are met; it is not a general restriction on every business loan.

1. Who is covered by Section 177(1)?

The restriction applies to an Indian company or a permanent establishment in India of a foreign company where interest or a similar payment is paid or payable on debt issued by a non-resident associated enterprise, and the relevant interest expenditure in the tax year exceeds Rs. 1 crore. If these conditions are satisfied, the excess interest determined under subsection (4) is not deductible while computing profits and gains of business or profession.

The Rs. 1 crore figure is an applicability threshold, not a blanket Rs. 1 crore deduction or an automatic disallowance of the amount exceeding Rs. 1 crore.

2. Third-party borrowing treated as associated enterprise debt - Section 177(2)

Even if the direct lender is not an associated enterprise, the debt is deemed to be issued by an associated enterprise if an associated enterprise provides an implicit or explicit guarantee to that lender, or deposits corresponding and matching funds with the lender. Thus, financing arrangements involving banks or other third parties must be reviewed for associated enterprise support.

3. Which borrowers and loans are exempt? - Section 177(3)

Interest paid on debt issued by a lender that is an Indian permanent establishment of a non-resident engaged in banking is excluded.
The restriction does not apply to an Indian company or Indian permanent establishment of a foreign company engaged in banking or insurance.
It also does not apply to a qualifying Finance Company located in an International Financial Services Centre (IFSC).
Notified classes of non-banking financial companies are excluded, subject to the relevant government notification.

Exemption claims should be supported by the precise statutory category, any applicable notification, and prescribed conditions.

4. How is excess interest calculated? - Section 177(4)

Excess interest is the lower of:

Total interest paid or payable above 30% of the borrower's earnings before interest, taxes, depreciation and amortisation (EBITDA) for the tax year; or
Interest paid or payable to associated enterprises for that tax year.

Calculation: Excess interest = lower of [total interest minus 30% of EBITDA, subject to a floor of zero] and [interest attributable to associated enterprises]. The computation must reflect the statutory conditions and any applicable guidance.

5. Can disallowed interest be carried forward? - Sections 177(5) and 177(6)

Interest not fully deducted under this restriction may be carried forward to succeeding tax years and deducted against business or professional profits, subject to the maximum allowable interest expenditure for the relevant year. Such carry-forward cannot extend beyond eight tax years immediately succeeding the year in which excess interest was first computed. Taxpayers should maintain year-wise schedules to monitor utilisation and expiry.

6. Important statutory definitions - Section 177(7)

Debt: Includes a loan, financial instrument, finance lease, financial derivative, or any arrangement generating deductible interest, discount or other finance charges in computing business or professional income.

Finance Company: Refers to a finance company under regulation 2(1)(e) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021, satisfying prescribed conditions and activities.

Permanent establishment: Has the meaning assigned by Section 173(c).

Associated enterprise: For the relevant transfer-pricing framework, see Section 162.

7. Practical example of interest limitation

Assume an Indian company has EBITDA of Rs. 10 crore, total interest expense of Rs. 4 crore, and interest on covered associated enterprise debt of Rs. 3 crore. Assume the statutory conditions are satisfied and no exemption applies.

30% of EBITDA = Rs. 3 crore.
Total interest above the EBITDA limit = Rs. 4 crore - Rs. 3 crore = Rs. 1 crore.
Covered associated enterprise interest = Rs. 3 crore.
Excess interest disallowed = lower of Rs. 1 crore and Rs. 3 crore = Rs. 1 crore.

The balance Rs. 3 crore is not disallowed by Section 177 on these assumptions, although ordinary deductibility conditions remain relevant. The Rs. 1 crore disallowed may qualify for carry-forward under subsections (5) and (6).

8. Compliance checklist

Identify non-resident associated enterprise loans and guarantees.
Review matching deposits and other arrangements supporting third-party debt.
Confirm whether annual interest exceeds the statutory threshold.
Calculate EBITDA, total interest, and interest relating to associated enterprises.
Review statutory exemptions, notifications, and IFSC conditions where relevant.
Maintain supporting loan agreements, guarantee documents and year-wise carry-forward records.

9. Frequently asked questions

Does Section 177 apply to every interest payment above Rs. 1 crore?

No. It applies only when the borrower, debt, associated enterprise and expenditure conditions in the section are satisfied, subject to the statutory exclusions.

Is the 30% EBITDA limit applied to the principal amount of a loan?

No. The provision concerns interest or similar finance expenditure, not the principal repayment itself.

Can a loan from an unrelated bank be covered?

Yes, where an associated enterprise guarantees the debt or places corresponding and matching funds with the lender as described in subsection (2).

For how many years can excess interest be carried forward?

For up to eight tax years immediately following the year in which the excess interest was first computed, subject to the statutory deduction limit.

Which provision of the Income-tax Act, 1961 corresponds to Section 177?

Section 94B, which dealt with limitation on interest deduction in certain cases.

10. Official legal sources

Official Section 177 text Income-tax Act 2025 and Rules

Last reviewed: 10 November 2026. This article is general legal information; case-specific computations require verification of facts and applicable rules.