Section 177 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 177 restricts the deduction of interest and similar payments on debt issued by a non-resident associated enterprise, once the interest in a tax year exceeds one crore rupees. The disallowed excess is the interest above 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA), or the interest paid to associated enterprises, whichever is less. The excess can be carried forward for up to eight tax years. This article reads it as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
Interest on debt issued by a non-resident associated enterprise, paid by an Indian company or by the Indian permanent establishment of a foreign company, is not deductible to the extent of excess interest where the total in the tax year exceeds one crore rupees. Excess interest is the total interest above 30% of EBITDA or the interest paid to associated enterprises, whichever is less. The unabsorbed part is carried forward for no more than eight tax years.
Scope
Section 177 is in Chapter X and restricts a deduction under the head "Profits and gains of business or profession". The Act came into force on the 1st April, 2026 (section 1(3)), save as otherwise provided. Later amendments, rules and notifications should be checked.
The meaning of associated enterprise is in section 162; the Chapter overview is Chapter X of the Income-tax Act, 2025. For a company funding itself with group debt and looking at the cap, our tax planning advisory team can help.
Section 177(1): the restriction
Irrespective of anything contrary in the Act, any expenditure by way of interest or similar payment in respect of excess interest, as specified in sub-section (4), is not deductible in computing income chargeable under the head "Profits and gains of business or profession", if:
- (a) it is paid or payable by an Indian company or a permanent establishment of a foreign company in India, in respect of any debt issued by an associated enterprise which is a non-resident; and
- (b) the sum of such expenditure in a tax year exceeds one crore rupees.
Both conditions must be met. The one crore rupee figure is on the sum of the expenditure in the tax year; a company paying one crore rupees or less is outside the section.
Section 177(2): back-to-back lending
Where a lender that is not an associated enterprise has issued a debt referred to in sub-section (1), the debt is deemed to have been issued by an associated enterprise if an associated enterprise has:
- (a) provided an implicit or explicit guarantee to the lender in respect of the debt; or
- (b) deposited corresponding and matching funds with the lender.
Section 177(3): who is outside the section
The section does not apply to:
- (a) interest paid in respect of a debt issued by a lender which is a permanent establishment in India of a non-resident engaged in the business of banking;
- (b) an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance, or a Finance Company located in any International Financial Services Centre, or such class of non-banking financial companies as may be notified by the Central Government in this behalf.
The class of non-banking financial companies is a matter for notification; what has been notified is not in the text consulted, and this article names none.
Section 177(4): excess interest
For sub-section (1), "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.
| Measure | What it is |
|---|---|
| A | total interest paid or payable, less 30% of the borrower's EBITDA for the tax year |
| B | interest paid or payable to associated enterprises for that tax year |
| Excess interest | the lower of A and B, as the sub-section is worded ("in excess of ... or the interest paid or payable to associated enterprises ... whichever is less") |
The sub-section's wording is compressed, and the reading in the table follows its text; check the official text for the exact construction before computing.
Section 177(5) and (6): carry forward
Interest expenditure not wholly deducted against income under the head "Profits and gains of business or profession" for any tax year is:
- (a) carried forward to the following tax year or years; and
- (b) allowed as a deduction against the profits and gains of any business or profession carried on by the assessee and assessable for that year, to the extent of the maximum allowable interest expenditure as per sub-section (4).
It cannot be carried forward for more than eight tax years immediately succeeding the tax year for which the excess interest was first computed.
Section 177(7): definitions
- "debt" means any loan, financial instrument, finance lease, financial derivative or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in computing income under the head "Profits and gains of business or profession";
- "Finance Company" means a finance company as defined in regulation 2(1)(e) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021, made under the International Financial Services Centres Authority Act, 2019 (50 of 2019), and which satisfies such conditions and carries on such activities as may be prescribed;
- "permanent establishment" has the meaning assigned in section 173(c).
The IFSCA Regulations and Act named in the definition should be checked by the reader; the Income-tax Act, 2025 does not set out their terms.
A worked example
Names and amounts are invented; the one crore rupee threshold, 30% and eight-year limits are as printed.
Kestrel Machines Limited, an Indian company, has EBITDA of Rs. 20,00,00,000 for the tax year. It pays interest of Rs. 8,00,00,000 in total, of which Rs. 7,00,00,000 is to a non-resident associated enterprise on debt it issued.
- The interest to the non-resident associated enterprise (Rs. 7,00,00,000) exceeds one crore rupees, so condition (b) in sub-section (1) is met.
- 30% of EBITDA = 30% x Rs. 20,00,00,000 = Rs. 6,00,00,000.
- Total interest in excess of that: Rs. 8,00,00,000 - Rs. 6,00,00,000 = Rs. 2,00,00,000.
- Interest paid to associated enterprises is Rs. 7,00,00,000.
- Excess interest is the lower of the two: Rs. 2,00,00,000.
- Rs. 2,00,00,000 is not deductible for the year. It is carried forward and allowed in a later year to the extent of the maximum allowable interest expenditure under sub-section (4), for not more than eight tax years after the year it was first computed.
If Kestrel's interest to the non-resident associated enterprise had been Rs. 90,00,000, the sum of such expenditure would not exceed one crore rupees, and the section would not apply.
Need help with the interest cap?
Group financing structures, back-to-back loans and the carry-forward all affect what is deductible. Our tax planning advisory service can test your borrowing against section 177 before you finalise the year's accounts.
Key takeaways
- The section applies to interest on debt issued by a non-resident associated enterprise when the year's sum exceeds one crore rupees.
- Debt from an unrelated lender is treated as associated-enterprise debt if the associated enterprise gives an implicit or explicit guarantee or deposits matching funds.
- Excess interest is the part above 30% of EBITDA, capped by the interest paid to associated enterprises.
- Banks, insurers, IFSC Finance Companies and notified classes of NBFCs are outside the section.
- Disallowed interest is carried forward for up to eight tax years.
Read next
- Section 176: transactions with persons in a notified jurisdictional area
- Sections 178 and 180: applicability of the general anti-avoidance rule
- Section 162: meaning of associated enterprise
- Chapter X of the Income-tax Act, 2025
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.