Income Tax - Thin Capitalisation

Section 94B Income Tax Act: Limitation on Interest Deduction

Section 94B of the Income-tax Act, 1961 limited the deduction of certain interest and similar expenditure arising from debt involving a non-resident associated enterprise. From 1 April 2026, the corresponding provision is Section 177 of the Income-tax Act, 2025.

Current law note: The Income-tax Act, 2025 came into force on 1 April 2026. For the current regime, read Section 177. Section 94B remains relevant when the Income-tax Act, 1961 continues to govern an earlier assessment year, proceeding, liability, right or other matter under the applicable repeal and savings provisions.
Who is covered?Indian companies and permanent establishments of foreign companies in India, subject to the statutory conditions.
ThresholdInterest or similar expenditure must exceed Rs. 1 crore for the relevant period before the limitation applies.
Core limitThe excess-interest computation uses 30% of EBITDA and interest paid or payable to associated enterprises.
Carry forwardInterest not allowed because of the limitation may be carried forward for up to eight succeeding years, subject to the statutory ceiling.
On this page

What is Section 94B of the Income-tax Act, 1961?

Section 94B was introduced as a thin-capitalisation rule to restrict excessive interest deductions in specified cross-border associated-enterprise financing. Broadly, it applied where an Indian company or a permanent establishment of a foreign company in India incurred deductible interest or expenditure of a similar nature exceeding Rs. 1 crore in relation to qualifying debt issued by a non-resident associated enterprise.

The provision operated notwithstanding other provisions of the 1961 Act. It did not automatically deny the whole interest expense. Instead, the deduction was restricted to the extent determined as "excess interest" under the statutory formula.

When did Section 94B apply?

The principal conditions may be understood as follows:

How is excess interest calculated?

Under Section 94B(2), the restriction is linked to the borrower's earnings before interest, taxes, depreciation and amortisation, commonly called EBITDA.

Excess interest = lower of: (a) total interest paid or payable above 30% of EBITDA, or (b) interest paid or payable to associated enterprises.

The Rs. 1 crore figure is an applicability threshold. It should not be confused with the 30% EBITDA computation used to determine the amount of excess interest.

Debt from an unrelated lender can also be covered

A debt issued by a lender that is not itself an associated enterprise can be treated as debt issued by an associated enterprise where an associated enterprise provides an implicit or explicit guarantee to that lender or places corresponding and matching funds with the lender. This anti-avoidance rule prevents the limitation from being bypassed merely by interposing an unrelated lender.

Exceptions and exclusions

The law contains important exclusions. Under the later form of Section 94B, the restriction did not apply to interest on debt issued by a lender that was a permanent establishment in India of a non-resident engaged in banking. The borrower-side exclusion also covered an Indian company or permanent establishment of a foreign company engaged in banking or insurance.

For the period for which the amendments applied, the exclusion was also extended to a Finance Company located in an International Financial Services Centre and to such classes of non-banking financial companies as may be notified by the Central Government. The exact exemption must therefore be checked for the relevant assessment year and taxpayer category.

Carry forward of interest restricted under Section 94B

Interest expenditure not wholly deductible because of Section 94B could be carried forward. It could be considered in a later assessment year against business or professional income, but only to the extent permitted by the maximum allowable interest expenditure for that later year.

The carry-forward period was capped at eight assessment years immediately succeeding the assessment year in which the excess interest was first computed.

Important definitions

Expression Meaning for Section 94B
Associated enterprise For the 1961 Act provision, this expression took its meaning from Section 92A(1) and 92A(2).
Debt Included a loan, financial instrument, finance lease, financial derivative, or another arrangement giving rise to deductible interest, discount or other finance charges.
Permanent establishment Included a fixed place of business through which the business of the enterprise was wholly or partly carried on.
Non-banking financial company For the amended 1961 Act provision, the expression referred to the meaning assigned through Section 36(1)(viia).
Finance Company For the applicable amended period, this referred to a qualifying finance company under the International Financial Services Centres Authority (Finance Company) Regulations, 2021, subject to prescribed conditions and activities.

Section 177 of the Income-tax Act, 2025: current corresponding provision

With effect from 1 April 2026, Section 177 of the Income-tax Act, 2025 is the corresponding provision dealing with limitation on interest deduction in certain cases. It carries forward the core thin-capitalisation framework in a reorganised form.

Section 177 applies where the specified interest or similar payment is made or payable by an Indian company or a permanent establishment of a foreign company in India in respect of debt issued by a non-resident associated enterprise and the expenditure exceeds Rs. 1 crore in the tax year. It retains the 30% EBITDA mechanism, the associated-enterprise guarantee or matching-funds rule, relevant exclusions and an eight-tax-year carry-forward framework.

Practical reading rule: For a tax year beginning under the Income-tax Act, 2025, start with Section 177. For an earlier assessment year or a matter preserved under the repeal and savings provisions, verify the applicable version of Section 94B and the amendments then in force.

Official references

Updated: 28 September 2026. Tax treatment depends on the law applicable to the relevant tax year, the taxpayer's facts, notified exclusions and transition provisions.