Section 177 — Limitation on interest deduction in certain cases. Successor to s.94B of the 1961 Act.
Section 177 is in Chapter X — Special Provisions Relating to Avoidance of Tax, which runs from section 161 to section 177.
Sub-section (1) disallows, irrespective of anything to the contrary in the Act, interest or similar payment in respect of "excess interest" under the head "Profits and gains of business or profession", where it is paid or payable by an Indian company or the Indian permanent establishment of a foreign company on debt issued by a non-resident associated enterprise, and the sum of that expenditure in the tax year exceeds one crore rupees.
Sub-section (2) extends the reach to third-party lending: where the lender is not an associated enterprise, the debt is deemed to have been issued by one if an associated enterprise has given the lender an implicit or explicit guarantee in respect of it, or has deposited corresponding and matching funds with that lender.
Sub-section (3) carves out interest on debt issued by a lender that is a permanent establishment in India of a non-resident engaged in banking, and takes the section off an Indian company or Indian permanent establishment of a foreign company engaged in banking or insurance, a Finance Company located in an International Financial Services Centre, and notified classes of non-banking financial companies.
Sub-section (4) defines "excess interest" as the lower of the total interest paid or payable in excess of 30% of the borrower's earnings before interest, taxes, depreciation and amortisation for the tax year, and the interest paid or payable to associated enterprises for that year. Sub-section (5) carries interest not wholly deducted forward and allows it against the profits and gains of any business or profession assessable for a later year, to the extent of the maximum allowable interest expenditure under sub-section (4); sub-section (6) caps the carry forward at eight tax years immediately succeeding the year for which the excess interest was first computed. Sub-section (7) defines "debt", defines "Finance Company" by reference to the International Financial Services Centres Authority (Finance Company) Regulations, 2021, and takes "permanent establishment" from section 173(c).
Interest is deductible while dividends are not, so a group can strip profits out of an Indian company by funding it with related-party debt instead of equity. The section caps the deduction by reference to the borrower's own operating earnings, and sub-section (2) closes the obvious escape of borrowing from an unrelated bank against a group guarantee or matching deposit. The one crore threshold keeps small borrowings out and the eight-year carry forward stops the disallowance being permanent.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Threshold for the section to apply at all | More than one crore rupees | The sum of the interest or similar expenditure in the tax year, paid or payable in respect of debt issued by a non-resident associated enterprise | Sub-section (1)(b) |
| Earnings-based limb of "excess interest" | 30% of earnings before interest, taxes, depreciation and amortisation | Total interest paid or payable in excess of that 30% of the borrower's ebitda for the tax year | Sub-section (4) |
| Associated enterprise limb of "excess interest" | The interest paid or payable to associated enterprises for the tax year | "Excess interest" is whichever of the two limbs is less | Sub-section (4) |
| Carry forward of disallowed interest | Eight tax years | Immediately succeeding the tax year for which the excess interest expenditure was first computed; each year's set off is limited by sub-section (4) | Sub-section (6) |
Sub-section (4) is a "whichever is less" test and both limbs must be computed before anything is disallowed; where related-party interest is small but total borrowing is heavy, the second limb keeps the disallowance down. The one crore figure is an entry test on the associated-enterprise interest, not a deductible slice. A guarantee alone converts a bank loan into associated-enterprise debt, and it may be implicit. Carried-forward interest is allowed only within a later year's own sub-section (4) ceiling, and dies after eight tax years.
An Indian company has ebitda of Rs. 100 crore and total interest of Rs. 45 crore, of which Rs. 20 crore is paid to a non-resident associated enterprise. Thirty per cent of ebitda is Rs. 30 crore, so total interest exceeds that by Rs. 15 crore, against associated enterprise interest of Rs. 20 crore. Excess interest is the lower figure, Rs. 15 crore, which is disallowed and may be carried forward for up to eight tax years; the section applies because the associated enterprise interest exceeds one crore rupees.
You meet it as a disallowance in the computation of business income and, if contested, as an addition in an assessment order in a group financing case — sometimes on an unrelated bank loan, where sub-section (2) is invoked on the strength of a parent's guarantee.
"excess interest" means the total interest paid or payable in excess of 30% of earnings before interest, taxes, depreciation and amortisation of the borrower in the tax year or the interest paid or payable to associated enterprises for that tax year, whichever is less
shall not be carried forward for more than eight tax years immediately succeeding the tax year for which the excess interest expenditure was first computed
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
