Section 35 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 35 starts with the words "Irrespective of any other provision of Chapter IV-D" and lists amounts that cannot be deducted in computing business or professional income. The list includes tax paid, a share of payments on which tax at source was not deducted or not paid in time, partner remuneration and interest above stated limits, and payments to members of an association of persons. This article explains the section as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
Section 35 disallows: tax paid (including surcharge and cess); 30 per cent of a sum payable to a resident on which tax is deductible at source but was not deducted or not paid by the due date; the whole of certain sums payable abroad or to non-residents in the same position; payments to employees' funds without arrangements for deduction; salary paid abroad or to a non-resident without tax deducted; certain payments to State Government undertakings; firm payments to partners above stated limits; and association of persons payments to members. The disallowed amount is allowed back in the year the tax is paid.
Where this section sits
Section 35 is the first of the disallowance sections in Part D of Chapter IV. Sections 34 and 37, which are covered by live posts, sit on either side of it. The next section, section 36, is in its own article. For the allowed deductions, see the article on section 32. A business that keeps its tax deduction records and books in order avoids most of these disallowances; our books of accounts compliance team helps with that.
Section 35(a): tax paid
No deduction is allowed for any amount on account of:
- (i) tax paid on income;
- (ii) tax paid by the employer referred to in Schedule III (Table: serial number 10); or
- (iii) tax paid in any other country for which relief is eligible under section 159 or 160,
and this includes any surcharge or cess on such tax, by whatever name called.
Section 35(b): tax at source not deducted or not paid
(b)(i): sums payable to a resident
30 per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XIX-B and, during the tax year, such tax has not been deducted or, after deduction, has not been paid up to the due date specified in section 263(1), is not allowed. Two rules soften this:
- (A) If the tax is deducted in a subsequent year, or is deducted during the tax year but paid after the due date in section 263(1), the 30 per cent of the sum is allowed as a deduction in the tax year in which the tax is paid.
- (B) If the assessee fails to deduct all or part of the tax but is not deemed to be an assessee in default under section 398(2), he is deemed to have deducted and paid the tax on the date the payee's return has been filed as referred to in section 398(2). For section 398, see our post on Section 398 and TDS default.
(b)(ii): payments abroad or to non-residents
Any interest, royalty, fees for technical services or other sum chargeable under the Act that is payable (A) outside India or (B) in India to a non-resident (not a company) or to a foreign company, on which tax is deductible at source under Chapter XIX-B and, during the tax year, the tax has not been deducted or, after deduction, has not been paid up to the due date in section 263(1), is not allowed (here the whole sum, not 30 per cent). The same two softening rules apply: the sum is allowed in the tax year in which the tax is paid, and a deemed deduction and payment applies on the date of the payee's return where section 398(2) says the assessee is not in default.
(b)(iii): provident or other fund for employees
Any payment to a provident or other fund established for the benefit of employees of the assessee is not allowed, unless the assessee has made effective arrangements to secure that tax shall be deducted at source under Chapter XIX-B from any payments from the fund that are chargeable to tax under the head "Salaries".
Example: payment to a contractor
Anil Traders (invented) pays Rs. 2,00,000 to a resident contractor in a tax year. Tax at source was deductible under Chapter XIX-B but Anil did not deduct it. Under section 35(b)(i), 30 per cent of the sum, 2,00,000 x 30% = Rs. 60,000, is not allowed as a deduction in that tax year. If Anil deducts and pays the tax in a later tax year, the Rs. 60,000 is allowed in the tax year in which the tax is paid, under clause (A). The rate of tax at source is not in section 35.
Section 35(c): salary paid abroad or to a non-resident
Any payment chargeable under the head "Salaries", payable outside India or to a non-resident, on which tax is deductible at source under Chapter XIX-B and such tax has not been deducted or, after deduction, has not been paid, is not allowed.
Section 35(d): State Government undertakings
Any amount (i) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on, or (ii) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government, is not allowed.
Section 35(e): payments by a firm to partners
For a firm assessable as such, the following expenditure is not allowed:
| Item | What is disallowed |
|---|---|
| (e)(i) | Salary, bonus, commission or remuneration, by whatever name called, to a partner who is not a working partner |
| (e)(ii)(A) | Remuneration to a working partner, and interest to any partner, not authorised by the partnership deed applicable for the period for which it is paid |
| (e)(ii)(B) | Remuneration or interest authorised by the deed but relating to a period before the date of that deed, or not authorised by the earlier deed |
| (e)(iii) | Aggregate remuneration to all working partners as authorised by the deed, exceeding the amount computed below |
| (e)(iv) | Interest to any partner as authorised by the deed, exceeding 12 per cent simple interest per annum |
The remuneration limit in (e)(iii).
| Slice of book profit | Maximum aggregate remuneration to working partners |
|---|---|
| On the first Rs. 6,00,000 of the book profit (printed as the first Rs. 600000) | Rs. 3,00,000 in case of a loss, or 90 per cent of the book profit, whichever is higher |
| On the balance of the book profit | 60 per cent |
The text prints "or in case of a loss, ` 300000 or at the rate of 90% of the book profit, whichever is higher". It is read here as Rs. 3,00,000 or 90 per cent of the book profit, whichever is higher, on the first Rs. 6,00,000 of book profit.
Definitions in (e)(v). "Book profit" means the net profit as shown in the profit and loss account for the relevant tax year, computed as per Chapter IV-D, increased by the aggregate remuneration to all the partners if that amount has been deducted in computing the net profit. A "working partner" is an individual actively engaged in conducting the affairs of the business or profession of the firm.
Representative capacity (e)(iv)(A) and (B). Where an individual is a partner on behalf of, or for the benefit of, another person: interest paid to him otherwise than as partner in a representative capacity is not taken into account for the 12 per cent test; interest paid to him as representative and to the person represented is taken into account; and interest received by an individual who is a partner otherwise than in a representative capacity, on behalf of or for the benefit of another person, is not taken into account.
Example: working partners' remuneration
Moon and Star Associates (an invented firm) has a book profit of Rs. 10,00,000 and two working partners whose deed authorises remuneration. The limit on the first Rs. 6,00,000 is the higher of Rs. 3,00,000 and 90 per cent of the book profit; 90% of 6,00,000 is Rs. 5,40,000, which is higher. The balance of the book profit is 10,00,000 minus 6,00,000 = Rs. 4,00,000, at 60 per cent = Rs. 2,40,000. The maximum is 5,40,000 + 2,40,000 = Rs. 7,80,000. Remuneration above that, or not authorised by the deed, is not allowed as a deduction.
Example: interest to a partner
The deed of Moon and Star provides interest at 15 per cent simple on a partner's capital of Rs. 5,00,000: Rs. 75,000 a year. The limit is 12 per cent: 5,00,000 x 12% = Rs. 60,000. Interest above that, Rs. 15,000, is not allowed.
Section 35(f): association of persons or body of individuals
The expenditure incurred by an association of persons or a body of individuals (other than a company, a co-operative society or a society registered under the Societies Registration Act, 1860 or a corresponding law) in the nature of interest, salary, bonus, commission or remuneration to a member is not allowed, provided that:
- where the association pays interest to a member and the member has also paid interest to it, only the excess interest paid by the association is disallowed;
- where an individual is a member on behalf of or for the benefit of another person (a "representative member" and "person so represented"), the clause does not apply to interest paid to or received from him otherwise than as representative member, applies to interest paid to or received from him as representative member and from the person represented, and does not apply to interest paid to a member otherwise than as a representative member on behalf of or for the benefit of another.
Need help with disallowances and tax at source?
The 30 per cent disallowance and the partner limits are among the most common adjustments in a business return, and most are avoidable with timely deduction and a well-drafted deed. For tax deduction compliance, see our books of accounts compliance service.
Key takeaways
- Tax paid, with surcharge and cess, is not deductible.
- 30 per cent of a payment to a resident is disallowed where tax at source was not deducted or not paid by the due date in section 263(1); the whole sum is disallowed for the foreign and non-resident payments in clause (b)(ii).
- The disallowed amount is allowed in the tax year in which the tax is paid.
- A firm's remuneration is capped by a book-profit formula and partner interest at 12 per cent simple, both only where authorised by the deed.
- An association of persons gets no deduction for payments to members, except as the provisos allow.
- Later amendments, rules and notifications should be checked.
Read next
- Section 36: payments to specified persons and other expenses not deductible
- Section 32: other deductions in computing business income
- Section 34: general deduction
- Section 398: TDS default
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.