Section 36 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 36 closes two gaps in business deductions. First, it lets the Assessing Officer disallow the excessive or unreasonable part of an expense paid to a "specified person" such as a relative, director or partner. Second, it disallows expenses paid above a daily limit otherwise than through a specified banking or online mode. This article explains the nine sub-sections as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
The Assessing Officer may disallow the part of an expense paid to a specified person that he considers excessive or unreasonable by reference to fair market value, the legitimate needs of the business and the benefit derived. A payment, or the aggregate paid in a day to one person, that exceeds Rs. 10,000 (Rs. 35,000 for plying, hiring or leasing goods carriages) and is not made through a specified banking or online mode is not deductible. An earlier-year deduction paid later in such a way becomes income of the later year. Marked to market loss is not allowed except under section 32(1)(h).
Where this section sits
Section 36 is in Part D of Chapter IV, after section 35 on amounts not deductible, in the article on section 35. It has effect "irrespective of anything to the contrary contained in any other provision of this Act relating to computation of income" under the head "Profits and gains of business or profession" (section 36(1)). Section 37, on deductions allowed on actual payment, is in our post on Section 37. For a business that pays relatives or group companies, or pays suppliers in cash, our books of accounts compliance team can review the position.
Section 36(2): excessive or unreasonable payments to a specified person
If the assessee incurs any expenditure for which payment has been or is to be made to a "specified person", which in the opinion of the Assessing Officer is excessive or unreasonable having regard to:
- (a) the fair market value of the goods, services or facilities; or
- (b) the legitimate needs of the business or profession of the assessee; or
- (c) the benefit derived by or accruing to the assessee,
so much of the expenditure as he considers excessive or unreasonable is not allowed as a deduction.
Section 36(3): who is a "specified person"
(a)(i): by type of assessee
| Serial number | Assessee | Specified person |
|---|---|---|
| 1 | Individual | Any relative of the assessee |
| 2 | Company | Any director of the company or his relative |
| 3 | Firm | Partner of the firm or his relative |
| 4 | Association of persons | Member of the association or his relative |
| 5 | Hindu undivided family | Member of the family or his relative |
"Relative" is defined in section 2(94): for an individual, the husband, wife, brother, sister or any lineal ascendant or descendant.
(a)(ii) to (iv): persons with a substantial interest
- (ii) Any individual, company, firm, association of persons or Hindu undivided family having substantial interest in the business or profession of the assessee, or any director, partner or member of it or their relatives, or any other company in which the first-mentioned company has substantial interest.
- (iii) A company, firm, association of persons or Hindu undivided family whose director, partner or member has a substantial interest in the business or profession of the assessee, or any director, partner or member of it and their relatives, as the case may be.
- (iv) Any person carrying on a business or profession, where the assessee (an individual or his relative; a company, its directors or their relatives; a firm, its partners or their relatives; an association of persons, its members or their relatives; or a Hindu undivided family, its members or their relatives) has a substantial interest in the business or profession of that person.
(b): "substantial interest in the business or profession"
A person is deemed to have it if:
- in a case where the business is carried on by a company, he is at any time during the tax year the beneficial owner of shares (not being shares entitled to a fixed rate of dividend, with or without a right to participate in profits) carrying not less than 20 per cent of the voting power; and
- in any other case, he is at any time during the tax year beneficially entitled to not less than 20 per cent of the profits of the business or profession.
Example: a payment to a director's relative
Orbit Engineering Pvt Ltd (invented) pays Rs. 4,00,000 as consulting charges to Rina, a sister of one of its directors. Rina is a relative of a director, so she is a specified person under serial number 2 of the Table. If the Assessing Officer, having regard to fair market value, the legitimate needs of the business and the benefit derived, considers that Rs. 1,50,000 of that is excessive, then Rs. 1,50,000 is not allowed and the balance of Rs. 2,50,000 (4,00,000 minus 1,50,000) is not affected by this sub-section. The Act prints no percentage or amount for the test; it rests on the Assessing Officer's opinion on those three criteria.
Section 36(4): payments above the daily limit
Where, for any expenditure incurred by the assessee, any payment or aggregate of payments made in a day to a person exceeds Rs. 10,000 and is not made through specified banking or online mode, the expenditure by way of such payments is not allowed as a deduction. The text of section 36 does not list the banking or online modes; it says "specified". What is specified is not in the text consulted.
Section 36(5): a later payment of an earlier deduction
Where a deduction was made in any preceding tax year for a liability incurred for any expenditure, and payment of that liability is made in a subsequent tax year, and the payment or aggregate of payments made in a day to a person exceeds Rs. 10,000 and is not made through specified banking or online mode, the payment is deemed to be income under "Profits and gains of business or profession" of the subsequent tax year.
Section 36(6): goods carriages
For sub-sections (4) and (5), the figure of Rs. 10,000 is read as Rs. 35,000 where the payment is for plying, hiring or leasing of goods carriages.
| Payment | Limit for the aggregate paid in a day to a person (above which a non-bank, non-online payment fails) |
|---|---|
| Any expenditure | Rs. 10,000 |
| Plying, hiring or leasing of goods carriages | Rs. 35,000 |
Section 36(7): cases where (4) and (5) do not apply
Sub-sections (4) and (5) do not apply in cases and circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors. The detail is left to the Income-tax Rules, 2026.
Section 36(8): protection for banking payments
Nothing (with reference to mode of payment) in any other law or contract applies to a payment made through a specified banking or online mode in compliance with sub-sections (4) to (7), and no plea is allowed in any suit or proceeding that the payment was not made or tendered in cash or in a mode other than a specified banking or online mode.
Section 36(9): marked to market loss
No deduction or allowance is allowed for marked to market loss or other expected loss, except as allowable under section 32(1)(h). Clause (h) of section 32 is explained in the article on section 32.
Examples on the payment limits
Cash purchase. Kamal Stores (invented) buys stationery for its business and pays Rs. 12,000 in cash to one supplier on one day. The payment exceeds Rs. 10,000 and is not made through a specified banking or online mode, so under section 36(4) the Rs. 12,000 is not allowed as a deduction. If it had paid Rs. 9,000 on one day, the daily limit would not be exceeded. The test is the aggregate in a day to a person: three payments of Rs. 4,000 on the same day to the same supplier total Rs. 12,000 and exceed the limit.
Goods carriage. Raj Logistics (invented) hires a goods carriage and pays Rs. 30,000 in cash in a day. Under section 36(6) the limit is Rs. 35,000, so section 36(4) is not triggered. A cash payment of Rs. 36,000 in a day would exceed it.
An earlier deduction paid later. In one tax year Kamal Stores deducts Rs. 20,000 for a liability to a supplier. In a later tax year it pays that liability in cash on one day. Under section 36(5) the Rs. 20,000 is deemed to be income of the later tax year, as the payment exceeds Rs. 10,000 and is not through a specified banking or online mode.
Need help with related-party and cash payments?
Related-party payments and cash payments are two of the most frequent grounds for disallowance in a business return. To review your payment records before filing, see our books of accounts compliance service.
Key takeaways
- The Assessing Officer may disallow the excessive or unreasonable part of a payment to a specified person.
- A specified person depends on the assessee: relative, director, partner, member, or a person with a substantial interest of not less than 20 per cent.
- A payment over Rs. 10,000 in a day to a person, other than through a specified banking or online mode, is not deductible; the figure is Rs. 35,000 for goods carriages.
- A later-year payment of an earlier deducted liability may become income of that later year.
- The rules may exempt cases from the cash limits.
- Marked to market loss is deductible only under section 32(1)(h).
Read next
- Section 35: amounts not deductible in computing business income
- Section 39: actual cost of assets
- Section 32: other deductions in computing business income
- Section 37: deductions on actual payment basis
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.