Interest Expense Disallowed

Sec 94B (1) – Scenario 1:

Sec 94B (3) – Scenario 2:

In this case, ABC Bank ltd. can claim entire 30 crores as deduction under PGBP because it is engaged in the business of banking/insurance.

Proviso to Sec 94B (1) – Scenario 3:

ABC ltd. having EBITDA of 6 crores, borrows 45 crores from International Bank, and pays interest of 3 crores. XYZ Inc deposits 45 crores with International Bank.

In this case, the loan will be assumed to be borrowed from an associated enterprise. Therefore, maximum allowable interest will be as follows:

  • 30% of 6 crores, i.e. 1.8 crores, or
  • Paid interest of 3 crores,

Whichever is LESS, i.e. 1.8 crores only

Certain Explanations:

  • Associated enterprise Same as 92A (2) and 92A (3) of Income Tax Act, 1961.
  • DebtAny loan, financial instrument, etc. that gives rise to interest, or other financial charges that are deductible under PGBP.
  • Permanent establishmentA fixed place of business through which the business of the enterprise is wholly or partly carried on.
    Note:All above examples are equally applicable even if ABC ltd is a foreign company having permanent establishment in India
  • EBITDA Earnings Before Interest Tax Depreciation and Amortization.

Disclaimer:"The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation."

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Ankit C Shetty