Rule 14 prescribes how to work out the expenditure attributable to income that does not form part of total income: expenditure directly relating to that income plus an amount equal to 1% of the annual average of the monthly averages of opening and closing balances of the related investments, capped at the total expenditure claimed.
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Rules 2026 · Rule 14
Section 14A disallowance method
Rules 3-14
The method (sub-rule 1). The expenditure in relation to income not forming part of total income is the aggregate of:
Cap (sub-rule 2). The amount worked out under sub-rule (1) cannot exceed the total expenditure claimed by the assessee.
How the two parts work. Part (a) captures expenses that can be tied directly to the exempt income. Part (b) is a formula amount for the general costs of holding the investments that produce it, measured on the average investment balance through the year. The cap in sub-rule (2) means the disallowance never exceeds what the assessee actually claimed.