Section 94B limits the deduction of interest paid by an Indian company, or a permanent establishment of a foreign company in India, as borrower. Where the borrower incurs interest or similar expenditure exceeding one crore rupees, deductible under "Profits and gains of business or profession", on debt issued by a non-resident associated enterprise, the interest is not deductible to the extent of excess interest. Debt from an unrelated lender is deemed issued by an associated enterprise where an associated enterprise gives the lender an implicit or explicit guarantee or deposits a matching amount with it.
Excess interest is the total interest paid or payable in excess of thirty per cent of the borrower's earnings before interest, taxes, depreciation and amortisation for the previous year, or the interest paid or payable to associated enterprises for that year, whichever is less.
Operative consequences
Interest disallowed may be carried forward and deducted against business profits of later years, within the maximum allowable interest for each year, but not for more than eight assessment years after the year in which it was first computed (sub-section (4)).
The section does not apply to interest on debt from a lender that is a permanent establishment in India of a non-resident banking business (sub-section (1A)).
It does not apply to a borrower engaged in banking or insurance, a Finance Company located in an International Financial Services Centre, or a notified class of non-banking financial companies (sub-section (3)).
"Associated enterprise" has the meaning in s. 92A(1) and (2).
Status
Operative for assessment year 2026-27. The exclusions in sub-section (3) carry the notes "Ins. by Act No. 15 of 2024, w.e.f. 1-4-2025" (Finance Company in an IFSC) and "Ins. by Act No. 08 of 2023, w.e.f. 1-4-2024" (notified non-banking financial companies). The Finance Act, 2026 does not amend this section.
The 1961 Act governs assessment year 2026-27 and earlier years; the Income-tax Act, 2025 governs tax year 2026-27 onwards, and for this subject the 2025 Act provision is s. 177.
Case Laws & Commentary
SECTION 94B — LIMITATION ON INTEREST DEDUCTION IN CERTAIN CASES
Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)
A. SECTION COMMENTARY
A.1 Structural position & legislative purpose
Section 94B, inserted by the Finance Act, 2017 (w.e.f. 1-4-2018, AY 2018-19), is India's 'thin capitalisation' rule implementing BEPS Action 4. It limits the deduction of interest (or similar consideration) paid by an Indian company (or an Indian permanent establishment of a foreign company) to a non-resident ASSOCIATED ENTERPRISE, in respect of debt, by disallowing the 'excess interest', being total interest paid or payable in excess of thirty per cent of the borrower's EBITDA (earnings before interest, taxes, depreciation and amortisation) or the interest paid or payable to associated enterprises, whichever is less. The object is to curb base erosion through excessive intra-group debt funding.
The rule applies only where interest expenditure to the AE exceeds Rs.1 crore in the year (de minimis). Debt is deemed to be from an AE where a non-resident AE provides an implicit or explicit guarantee or deposits a corresponding and matching amount with the lender (proviso to sub-section (1)). The disallowed interest can be CARRIED FORWARD for up to eight assessment years and set off against EBITDA-based capacity of those years (sub-section (4)). Banking and insurance businesses, a Finance Company located in any International Financial Services Centre and notified classes of non-banking financial companies are excluded (sub-section (3)); sub-section (1A), added by FA 2020, excludes interest on a debt issued by a lender which is a PE in India of a non-resident engaged in the business of banking.
A.2 Sub-section / clause taxonomy
Sub-section (1): Where an Indian company, or a PE of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding Rs.1 crore, which is deductible in computing income under 'Profits and gains of business or profession' in respect of any debt issued by a non-resident associated enterprise, the interest is not deductible to the extent that it arises from excess interest as specified in sub-section (2).
Proviso to sub-section (1): Where the debt is issued by a lender who is not an AE, but a non-resident AE either provides an implicit/explicit guarantee to that lender or deposits a corresponding and matching amount of funds with the lender, such debt is deemed to have been issued by an AE.
Sub-section (1A): Sub-section (1) does not apply to interest paid in respect of a debt issued by a lender which is a PE in India of a non-resident engaged in the business of banking.
Sub-section (2): Excess interest means the total interest paid or payable in excess of thirty per cent of the borrower's EBITDA in the previous year, or the interest paid or payable to associated enterprises for that previous year, whichever is less.
Sub-section (3): Sub-section (1) does not apply to an Indian company or a PE of a foreign company engaged in the business of banking or insurance, or to a Finance Company located in any International Financial Services Centre (inserted w.e.f. 1-4-2025) or such class of non-banking financial companies as may be notified (inserted w.e.f. 1-4-2024).
Sub-section (4): The interest disallowed under sub-section (1) (excess interest) may be carried forward for up to eight assessment years immediately succeeding and set off against the income computed under business/profession to the extent of the maximum allowable interest expenditure of those years.
Sub-section (5): Defines 'associated enterprise', 'debt', 'non-banking financial company', 'permanent establishment', 'Finance Company' and 'International Financial Services Centre' for the purposes of the section.
A.3 Core doctrinal themes
Theme (1) — 30%-EBITDA cap on AE interest: the core mechanic; excess interest paid to (or guaranteed by) a non-resident AE beyond 30% of EBITDA is disallowed in the year.
Theme (2) — Deemed-AE debt via guarantee/back-to-back deposit (proviso to sub-section (1)): catches structuring through unrelated lenders backed by AE guarantees or matching deposits.
Theme (3) — Carry-forward of disallowed interest (eight years): the disallowance is a timing restriction (with an eight-year carry-forward), not a permanent denial, subject to future EBITDA headroom.
Theme (4) — De minimis and sector carve-outs: Rs.1 crore threshold; banking/insurance excluded. Being a 2018-onward rule, appellate jurisprudence is still developing and turns on EBITDA computation, the scope of 'interest of similar nature', and the deemed-AE test.
FA 2017 (w.e.f. 1-4-2018 / AY 2018-19): Section 94B inserted — thin-cap / interest-limitation rule (BEPS Action 4); 30% EBITDA cap, Rs.1 crore de minimis, eight-year carry-forward, banking/insurance exclusion.
FA 2020 (w.e.f. AY 2021-22): Sub-section (1A) inserted, excluding interest paid in respect of a debt issued by a lender which is a PE in India of a non-resident engaged in the business of banking.
FA 2023 (w.e.f. 1-4-2024): Sub-section (3) extended to such class of non-banking financial companies as may be notified.
Finance (No. 2) Act, 2024 (w.e.f. 1-4-2025): Sub-section (3) extended to a Finance Company located in any International Financial Services Centre.
FA 2026: No amendment to s.94B; the interest-limitation rule is preserved.
A.5 CA practitioner pointers
(1) For any Indian company/PE with intra-group (or AE-guaranteed) borrowings, compute AE interest against the 30%-EBITDA cap each year; disallow and track the excess for carry-forward (eight years).
(2) Watch the proviso to sub-section (1) — third-party loans backed by a non-resident AE guarantee or matching deposit are deemed AE debt and counted toward the cap.
(3) Apply the Rs.1 crore de minimis and the banking/insurance carve-out before computing any disallowance; document the EBITDA computation and the 'interest of similar nature' classification, as these are the emerging dispute areas.
B. FA 2026 IMPACT NOTE
Section 94B is NOT amended by the Finance Act, 2026. The thin-capitalisation interest-limitation rule (30% EBITDA cap, Rs.1 crore de minimis, eight-year carry-forward, banking/insurance exclusion) continues up to AY 2026-27.
No FA 2026 change to the cap, threshold or carry-forward; practitioners apply the existing framework and the FA 2020 banking-PE exclusion.
C. CASE LAW — CLUSTERED BY ISSUE
Section 94B is a recent (AY 2018-19) provision; squarely-on-point High Court / Supreme Court authority is still limited, and most guidance is at the DRP/ITAT level on EBITDA computation, the meaning of 'interest of similar nature', and the deemed-AE test under the proviso to sub-section (1). The candid position is stated rather than supported by off-point citations. The contextual framework and principal compliance touch-points are summarised below.
Cluster C-1 : Operation of the interest-limitation rule (contextual)
1. Thin-capitalisation framework — s.94B (BEPS Action 4) and the EBITDA-cap mechanics
Facts: An Indian company/PE pays interest exceeding Rs.1 crore to (or on debt guaranteed/matched by) a non-resident AE; part of the interest exceeds 30% of EBITDA.
Issue: How much of the AE interest is deductible, and what happens to the excess.
Held: Under the framework, the interest deductible is capped with reference to 30% of EBITDA; the excess interest (lower of total interest above 30% EBITDA, or interest to the AE) is disallowed for the year and may be carried forward for up to eight assessment years for set-off against future EBITDA headroom. Banking/insurance businesses and the Rs.1 crore de minimis are carve-outs.
Ratio: Section 94B restricts (with an eight-year deferral) the deduction of excessive AE-related interest; it is a timing limitation aimed at base erosion, not a permanent denial.
Relevance: Operative compliance position under s.94B; applied at assessment level pending development of appellate jurisprudence.
D. PRACTITIONER'S NOTE
Thin-cap compliance flow: (1) identify AE (and deemed-AE under the proviso to sub-section (1)) interest above Rs.1 crore; (2) compute EBITDA and the 30% cap; (3) disallow the excess interest and record it for carry-forward (eight years); (4) apply the banking/insurance carve-out where relevant; (5) document the EBITDA build-up and the classification of 'interest of similar nature'.
Candid note: jurisprudence is maturing. The principal current disputes concern what is included in EBITDA and 'interest', and the reach of the deemed-AE guarantee/deposit test — document positions on these carefully.
Caveat: This material is treatise-style commentary for practitioners and academic use. It is not legal opinion. Verify the current text, the latest CBDT circulars/notifications and the most recent appellate position before relying on any proposition in assessment, audit (Form 3CEB) or litigation.
Function in the statutory architecture
Section 94B limits the deduction of interest paid by an Indian company, or a permanent establishment of a foreign company in India, as borrower. Where the borrower incurs interest or similar expenditure exceeding one crore rupees, deductible under "Profits and gains of business or profession", on debt issued by a non-resident associated enterprise, the interest is not deductible to the extent of excess interest. Debt from an unrelated lender is deemed issued by an associated enterprise where an associated enterprise gives the lender an implicit or explicit guarantee or deposits a matching amount with it.
Excess interest is the total interest paid or payable in excess of thirty per cent of the borrower's earnings before interest, taxes, depreciation and amortisation for the previous year, or the interest paid or payable to associated enterprises for that year, whichever is less.
Operative consequences
Status
Operative for assessment year 2026-27. The exclusions in sub-section (3) carry the notes "Ins. by Act No. 15 of 2024, w.e.f. 1-4-2025" (Finance Company in an IFSC) and "Ins. by Act No. 08 of 2023, w.e.f. 1-4-2024" (notified non-banking financial companies). The Finance Act, 2026 does not amend this section.
The 1961 Act governs assessment year 2026-27 and earlier years; the Income-tax Act, 2025 governs tax year 2026-27 onwards, and for this subject the 2025 Act provision is s. 177.
Case Laws & Commentary
SECTION 94B — LIMITATION ON INTEREST DEDUCTION IN CERTAIN CASES
Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)
A. SECTION COMMENTARY
A.1 Structural position & legislative purpose
Section 94B, inserted by the Finance Act, 2017 (w.e.f. 1-4-2018, AY 2018-19), is India's 'thin capitalisation' rule implementing BEPS Action 4. It limits the deduction of interest (or similar consideration) paid by an Indian company (or an Indian permanent establishment of a foreign company) to a non-resident ASSOCIATED ENTERPRISE, in respect of debt, by disallowing the 'excess interest', being total interest paid or payable in excess of thirty per cent of the borrower's EBITDA (earnings before interest, taxes, depreciation and amortisation) or the interest paid or payable to associated enterprises, whichever is less. The object is to curb base erosion through excessive intra-group debt funding.
The rule applies only where interest expenditure to the AE exceeds Rs.1 crore in the year (de minimis). Debt is deemed to be from an AE where a non-resident AE provides an implicit or explicit guarantee or deposits a corresponding and matching amount with the lender (proviso to sub-section (1)). The disallowed interest can be CARRIED FORWARD for up to eight assessment years and set off against EBITDA-based capacity of those years (sub-section (4)). Banking and insurance businesses, a Finance Company located in any International Financial Services Centre and notified classes of non-banking financial companies are excluded (sub-section (3)); sub-section (1A), added by FA 2020, excludes interest on a debt issued by a lender which is a PE in India of a non-resident engaged in the business of banking.
A.2 Sub-section / clause taxonomy
Sub-section (1): Where an Indian company, or a PE of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding Rs.1 crore, which is deductible in computing income under 'Profits and gains of business or profession' in respect of any debt issued by a non-resident associated enterprise, the interest is not deductible to the extent that it arises from excess interest as specified in sub-section (2).
Proviso to sub-section (1): Where the debt is issued by a lender who is not an AE, but a non-resident AE either provides an implicit/explicit guarantee to that lender or deposits a corresponding and matching amount of funds with the lender, such debt is deemed to have been issued by an AE.
Sub-section (1A): Sub-section (1) does not apply to interest paid in respect of a debt issued by a lender which is a PE in India of a non-resident engaged in the business of banking.
Sub-section (2): Excess interest means the total interest paid or payable in excess of thirty per cent of the borrower's EBITDA in the previous year, or the interest paid or payable to associated enterprises for that previous year, whichever is less.
Sub-section (3): Sub-section (1) does not apply to an Indian company or a PE of a foreign company engaged in the business of banking or insurance, or to a Finance Company located in any International Financial Services Centre (inserted w.e.f. 1-4-2025) or such class of non-banking financial companies as may be notified (inserted w.e.f. 1-4-2024).
Sub-section (4): The interest disallowed under sub-section (1) (excess interest) may be carried forward for up to eight assessment years immediately succeeding and set off against the income computed under business/profession to the extent of the maximum allowable interest expenditure of those years.
Sub-section (5): Defines 'associated enterprise', 'debt', 'non-banking financial company', 'permanent establishment', 'Finance Company' and 'International Financial Services Centre' for the purposes of the section.
A.3 Core doctrinal themes
Theme (1) — 30%-EBITDA cap on AE interest: the core mechanic; excess interest paid to (or guaranteed by) a non-resident AE beyond 30% of EBITDA is disallowed in the year.
Theme (2) — Deemed-AE debt via guarantee/back-to-back deposit (proviso to sub-section (1)): catches structuring through unrelated lenders backed by AE guarantees or matching deposits.
Theme (3) — Carry-forward of disallowed interest (eight years): the disallowance is a timing restriction (with an eight-year carry-forward), not a permanent denial, subject to future EBITDA headroom.
Theme (4) — De minimis and sector carve-outs: Rs.1 crore threshold; banking/insurance excluded. Being a 2018-onward rule, appellate jurisprudence is still developing and turns on EBITDA computation, the scope of 'interest of similar nature', and the deemed-AE test.
A.4 Legislative evolution / Finance Act amendment trail
FA 2017 (w.e.f. 1-4-2018 / AY 2018-19): Section 94B inserted — thin-cap / interest-limitation rule (BEPS Action 4); 30% EBITDA cap, Rs.1 crore de minimis, eight-year carry-forward, banking/insurance exclusion.
FA 2020 (w.e.f. AY 2021-22): Sub-section (1A) inserted, excluding interest paid in respect of a debt issued by a lender which is a PE in India of a non-resident engaged in the business of banking.
FA 2023 (w.e.f. 1-4-2024): Sub-section (3) extended to such class of non-banking financial companies as may be notified.
Finance (No. 2) Act, 2024 (w.e.f. 1-4-2025): Sub-section (3) extended to a Finance Company located in any International Financial Services Centre.
FA 2026: No amendment to s.94B; the interest-limitation rule is preserved.
A.5 CA practitioner pointers
(1) For any Indian company/PE with intra-group (or AE-guaranteed) borrowings, compute AE interest against the 30%-EBITDA cap each year; disallow and track the excess for carry-forward (eight years).
(2) Watch the proviso to sub-section (1) — third-party loans backed by a non-resident AE guarantee or matching deposit are deemed AE debt and counted toward the cap.
(3) Apply the Rs.1 crore de minimis and the banking/insurance carve-out before computing any disallowance; document the EBITDA computation and the 'interest of similar nature' classification, as these are the emerging dispute areas.
B. FA 2026 IMPACT NOTE
Section 94B is NOT amended by the Finance Act, 2026. The thin-capitalisation interest-limitation rule (30% EBITDA cap, Rs.1 crore de minimis, eight-year carry-forward, banking/insurance exclusion) continues up to AY 2026-27.
No FA 2026 change to the cap, threshold or carry-forward; practitioners apply the existing framework and the FA 2020 banking-PE exclusion.
C. CASE LAW — CLUSTERED BY ISSUE
Section 94B is a recent (AY 2018-19) provision; squarely-on-point High Court / Supreme Court authority is still limited, and most guidance is at the DRP/ITAT level on EBITDA computation, the meaning of 'interest of similar nature', and the deemed-AE test under the proviso to sub-section (1). The candid position is stated rather than supported by off-point citations. The contextual framework and principal compliance touch-points are summarised below.
Cluster C-1 : Operation of the interest-limitation rule (contextual)
1. Thin-capitalisation framework — s.94B (BEPS Action 4) and the EBITDA-cap mechanics
Facts: An Indian company/PE pays interest exceeding Rs.1 crore to (or on debt guaranteed/matched by) a non-resident AE; part of the interest exceeds 30% of EBITDA.
Issue: How much of the AE interest is deductible, and what happens to the excess.
Held: Under the framework, the interest deductible is capped with reference to 30% of EBITDA; the excess interest (lower of total interest above 30% EBITDA, or interest to the AE) is disallowed for the year and may be carried forward for up to eight assessment years for set-off against future EBITDA headroom. Banking/insurance businesses and the Rs.1 crore de minimis are carve-outs.
Ratio: Section 94B restricts (with an eight-year deferral) the deduction of excessive AE-related interest; it is a timing limitation aimed at base erosion, not a permanent denial.
Relevance: Operative compliance position under s.94B; applied at assessment level pending development of appellate jurisprudence.
D. PRACTITIONER'S NOTE
Thin-cap compliance flow: (1) identify AE (and deemed-AE under the proviso to sub-section (1)) interest above Rs.1 crore; (2) compute EBITDA and the 30% cap; (3) disallow the excess interest and record it for carry-forward (eight years); (4) apply the banking/insurance carve-out where relevant; (5) document the EBITDA build-up and the classification of 'interest of similar nature'.
Candid note: jurisprudence is maturing. The principal current disputes concern what is included in EBITDA and 'interest', and the reach of the deemed-AE guarantee/deposit test — document positions on these carefully.
Caveat: This material is treatise-style commentary for practitioners and academic use. It is not legal opinion. Verify the current text, the latest CBDT circulars/notifications and the most recent appellate position before relying on any proposition in assessment, audit (Form 3CEB) or litigation.