Income not forming part of total income and expenditure in relation to such income
[Section 14 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 14(1) of Income Tax Act 2025
14(1) Irrespective of anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income.
Section 14(2) of Income Tax Act 2025
14(2) Where the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with—
- (a) the correctness of the claim of expenditure incurred by the assessee; or
- (b) the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the total income under this Act, he shall determine such amount of expenditure in accordance with any method, as prescribed.
Section 14(3) of Income Tax Act 2025
14(3) Irrespective of anything to the contrary contained in this Act, the provisions of this section shall apply in a case where any expenditure has been incurred during any tax year in relation to income which does not form part of the total income under this Act, but such income has not accrued or arisen or has not been received during that tax year.
FAQs on Section 14 of Income Tax Act 2025
1. What does Section 14(1) of the Income Tax Act, 2025 state?
Section 14(1) states that no deduction shall be allowed for any expenditure incurred in relation to income that does not form part of the total income. This means taxpayers cannot claim deductions for expenses linked to exempt income.
2. What is the purpose of Section 14(2)?
Section 14(2) empowers the Assessing Officer (AO) to determine the expenditure related to exempt income if:
(a) The AO is not satisfied with the correctness of the assessee’s claim regarding the expenditure incurred, or
(b) The assessee claims that no expenditure was incurred.
The AO will compute the amount of such expenditure using a prescribed method.
3. When does Section 14(3) become applicable?
Section 14(3) applies when any expenditure is incurred in relation to income that is exempt, even if such income has not yet accrued, arisen, or been received in the relevant tax year.
4. Why is expenditure related to exempt income disallowed?
The logic is that since exempt income is not subject to tax, any expenses incurred to earn such income should also not be allowed as deductions while computing taxable income.
5. What happens if an assessee claims that no expenditure was incurred for earning exempt income?
If the Assessing Officer is not satisfied with this claim, they can determine the appropriate expenditure amount using a prescribed method under Section 14(2).
6. What type of income does Section 14 cover?
This section applies to income that does not form part of total income under the Income Tax Act, such as:
- Dividend income exempt under certain conditions
- Agricultural income
- Income from a fund or trust specified in the Act
- Other income explicitly exempted under different provisions
7. Can an assessee claim partial expenditure related to both exempt and taxable income?
Yes, if the expenditure is partly related to exempt income and partly to taxable income, only the portion attributable to taxable income may be allowed as a deduction. However, the AO can apply a prescribed method to determine the correct proportion.
8. How will the Assessing Officer determine the disallowed expenditure?
The Assessing Officer will use a prescribed method for computing the amount of expenditure related to exempt income, as per the rules formulated under the Income Tax Act.
9. What if the expenditure is incurred, but exempt income is not received in the same year?
Under Section 14(3), even if exempt income has not been received in the same tax year, any expenditure incurred to earn such income will still be disallowed.
10. Is Section 14 applicable to all taxpayers?
Yes, Section 14 applies to all taxpayers, including individuals, Hindu Undivided Families (HUFs), firms, and companies, if they have exempt income.
11. Can an assessee challenge the Assessing Officer’s determination under Section 14(2)?
Yes, if the assessee disagrees with the AO’s determination, they can challenge it through appeal mechanisms available under the Income Tax Act.
12. Does Section 14 apply to foreign income exempt under DTAA?
Yes, if an income is exempt due to a Double Taxation Avoidance Agreement (DTAA), the related expenditure may also be disallowed under this section.
13. How does Section 14 impact companies and investment funds?
Companies and investment funds earning exempt income, such as dividend income or tax-free bond interest, cannot claim deductions for expenses incurred in relation to such income.
14. How can businesses ensure compliance with Section 14?
Businesses should maintain proper records of expenditures, segregate expenses related to exempt and taxable income, and adhere to prescribed rules for calculating disallowed expenditure.
15. What are the consequences of non-compliance with Section 14?
If an assessee fails to report the correct expenditure, the AO can disallow deductions, impose penalties, and initiate scrutiny proceedings under the Income Tax Act.
16. Does this section affect loss calculations?
Yes, since expenses related to exempt income are disallowed, they cannot be used to create or increase business losses.
17. How can an assessee justify no expenditure on exempt income?
To justify zero expenditure, the assessee must provide documentary evidence proving that no direct or indirect cost was incurred to earn the exempt income.
18. Are capital expenditures also disallowed under Section 14?
Yes, both revenue and capital expenditures related to exempt income may be disallowed under this section.
19. Does Section 14 apply to charitable trusts?
Section 14 does not override specific provisions for charitable trusts, but if a trust has exempt income, it must follow the same principle of disallowing related expenditures.
20. Can the prescribed method under Section 14(2) change over time?
Yes, the government may update the prescribed method through notifications and amendments to the Income Tax Rules.
Section 14 of the Income Tax Act, 2025 ensures that no deduction is allowed for any expenditure incurred in relation to income that does not form part of total income. This prevents taxpayers from reducing their taxable income by claiming expenses linked to exempt income.
The Assessing Officer has the authority to determine the correct amount of such expenditure if they find the assessee’s claims unsatisfactory. Moreover, this disallowance applies even if the exempt income has not yet accrued, arisen, or been received in the same tax year.
To ensure compliance, taxpayers must maintain clear records, correctly allocate expenses, and follow prescribed rules. Failure to comply may lead to disallowances, penalties, and scrutiny from tax authorities.
Ultimately, Section 14 reinforces the principle that expenses incurred for earning tax-free income should not be used to reduce taxable income, promoting fairness and consistency in tax calculations.
