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Section 14A disallowance calculator FY 2025-26

Expenses incurred to earn exempt income are not deductible, and when the claim is doubted Rule 8D supplies a formula: direct expenses plus 1% of the average investment, never more than the expenses actually claimed. Enter thirteen balances for FY 2025-26 (AY 2026-27) and get the month-by-month working, the capped figure, and the clause it goes into in the 2026 tax audit report — or switch to tax year 2026-27 for the new Section 14 and Form No. 26 references.

Which year is this for — FY 2025-26 or tax year 2026-27?
The arithmetic is the same; the section, rule and audit-report clause you cite are not
Investment balances — opening and twelve month-ends
Value, as in the books, of investments whose income does not or will not form part of total income
Each month’s closing balance is the next month’s opening balance, so thirteen figures give twelve monthly averages.
Expenditure and income
Why this matters in audit

The whole computation rests on thirteen balances.

The usual error is not the 1% — it is taking the opening and closing balance of the year and skipping the months in between. The investment ledger already holds every month-end figure; CORAA reads them from the books so the working ties to the trial balance.

Working through the rest of the disallowance clauses? TDS-default disallowance calculator · MSME 43B(h) checker · Form 3CD to Form 26 clause mapper

How the Section 14A disallowance is worked out for FY 2025-26 (AY 2026-27)

Section 14A(1) of the Income-tax Act, 1961 denies a deduction for expenditure incurred in relation to income that does not form part of total income — a partner’s share of firm profit, interest on tax-free bonds, agricultural income and the like. The assessee first makes its own claim: either a figure it has identified, or a claim that nothing was spent. Under Section 14A(2) and (3), the Assessing Officer moves to the prescribed method only if, having regard to the accounts, the officer is not satisfied with that claim. The prescribed method is Rule 8D.

Rule 8D(2), in the form it has had since June 2016, has two limbs. The first is the expenditure directly relating to the exempt income. The second is 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. A proviso then caps the total of the two limbs at the total expenditure claimed by the assessee. The older three-limb formula, with its separate interest apportionment and a 0.5% factor, applies only to years before the 2016 substitution.

Two later changes matter. The Finance Act 2022 added an Explanation to Section 14A, effective 1 April 2022, so that the section applies where expenditure was incurred in relation to exempt income even though no such income accrued, arose or was received in that year. And from tax year 2026-27 the provision moves to Section 14 of the Income-tax Act, 2025 — the no-income rule now sits in the section itself as sub-section (3) — with Rule 14 of the Income-tax Rules, 2026 as the prescribed method in place of Rule 8D. FY 2025-26 (AY 2026-27) is still a 1961-Act year.

In the tax audit report the figure is disclosed under clause 21(h) of Form 3CD for years under the 1961 Act. For tax year 2026-27 onward the report is Form No. 26, and the corresponding item is clause 26, which asks for the inadmissible amount in so many words — “even if such income has not been accrued or received during the tax year”.

Worked example — a company holding firm capital and tax-free bonds, FY 2025-26

A company holds investments whose income is exempt. The book value is ₹4.00 crore on 1 April, rising to ₹4.60 crore at the end of June, ₹5.20 crore at the end of September and ₹5.80 crore at the end of January, where it stays to 31 March. It paid ₹1.2 lakh in custody and portfolio charges, claimed total expenditure of ₹3.8 crore, earned ₹9 lakh of exempt income and offered ₹1.2 lakh as its own disallowance.

Inputs
Sum of the twelve monthly averages₹59,10,00,000
Annual average (÷ 12)₹4,92,50,000
Direct expenditure₹1,20,000
Total expenditure claimed₹3,80,00,000
Output
Limb (i) — direct expenditure₹1,20,000
Limb (ii) — 1% of ₹4.925 crore₹4,92,500
Total, within the cap₹6,12,500
Already offered₹1,20,000
Further exposure₹4,92,500
Reported inForm 3CD, clause 21(h)
A two-point average of the year’s opening and closing balances would give ₹4.90 crore rather than ₹4.925 crore — a small gap here, but one that widens sharply when purchases or sales bunch in a few months, and the rule asks for monthly averages. The same balances in tax year 2026-27 would give the same arithmetic, cited under Section 14 and reported in clause 26 of Form No. 26.

Common mistakes

Averaging only the year’s opening and closing balance
The rule takes the annual average of the monthly averages of opening and closing balances — twelve monthly figures, then their mean. A two-point average overstates the base when investments were sold during the year and understates it when they were bought early.
Using the pre-2016 formula
The earlier Rule 8D had three limbs, including a proportionate interest disallowance and 0.5% of average investments. Since the June 2016 substitution there are two limbs and the factor is 1%, with a cap at total expenditure claimed. Old working-paper templates still carry the three-limb version.
Assuming no exempt income means no disallowance
From 1 April 2022 the Explanation to Section 14A applies the section where expenditure was incurred in relation to exempt income even if none accrued or was received in the year. The Explanation is worded as always having applied, while the amendment took effect from 1 April 2022, so its reach into earlier years has been litigated — for AY 2022-23 onward it applies on its terms.
Jumping to Rule 8D without the satisfaction step
The rule is not automatic. The Assessing Officer must first be dissatisfied, having regard to the accounts, with the assessee’s own claim. A reasoned suo motu disallowance, supported by a working, is the first line of defence — and the auditor’s disclosure should be consistent with it.
Including every investment in the base
The limb refers to investments whose income does not or shall not form part of total income. Tribunal decisions restrict the base to investments that actually yielded exempt income in the year and accept that no proportionate disallowance arises where own funds exceed the investments. Since dividends became taxable in shareholders’ hands from 1 April 2020, ordinary equity holdings generally fall outside the base.
Forgetting the cap
The total of the two limbs cannot exceed the total expenditure claimed. For an investment holding entity with thin expenses, the cap — not the 1% — often decides the number.
Treating stock-in-trade as outside the section
The Supreme Court in Maxopp Investment (2018) held that the purpose for which shares are held does not take them outside Section 14A; shares held as stock-in-trade that yield exempt income are within it.

Frequently asked questions

How is the Section 14A disallowance calculated under Rule 8D for FY 2025-26 (AY 2026-27)?+
Add (i) the expenditure directly relating to exempt income and (ii) 1% of the annual average of the monthly averages of the opening and closing balances of investments whose income does not or shall not form part of total income. The total cannot exceed the total expenditure claimed by the assessee.
Does Section 14A apply in FY 2025-26 if there is no exempt income during the year?+
Yes — it has applied that way for AY 2022-23 onward, including AY 2026-27. The Explanation inserted by the Finance Act 2022, effective 1 April 2022, applies the section where expenditure was incurred in relation to exempt income even though that income did not accrue, arise or get received in the year. Under the Income-tax Act, 2025 the same rule is written into Section 14(3).
What is the new section for 14A under the Income-tax Act, 2025 for tax year 2026-27?+
Section 14 of the Income-tax Act, 2025, which applies from tax year 2026-27 (FY 2026-27). Sub-section (1) carries the disallowance, sub-section (2) the Assessing Officer’s power to apply the prescribed method, and sub-section (3) the rule that it applies even where no exempt income arose in the year. The prescribed method is Rule 14 of the Income-tax Rules, 2026, the successor to Rule 8D.
Where is the Section 14A disallowance reported in the tax audit report for AY 2026-27?+
In clause 21(h) of Form 3CD — that is the clause for every year under the 1961 Act, including FY 2025-26 (AY 2026-27). For tax year 2026-27 onward, audited in 2027, the tax audit report is Form No. 26 and the item is clause 26 in the particulars of expenses.
Is Rule 8D mandatory in every case?+
No. It applies only where the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the assessee’s own claim of expenditure — or with a claim that no expenditure was incurred — in relation to exempt income.
Can the disallowance exceed the total expenditure claimed?+
No. The proviso to Rule 8D(2) caps the aggregate of the two limbs at the total expenditure claimed by the assessee.
Do equity shares still attract Section 14A now that dividends are taxable?+
Dividends have been taxable in the shareholder’s hands since 1 April 2020, so an ordinary equity holding no longer produces exempt dividend income. The section remains relevant for investments that do yield exempt income — a partner’s capital in a firm, tax-free bonds, and similar holdings.
Is interest still apportioned separately under Rule 8D?+
Not since June 2016. The earlier rule had a separate proportionate-interest limb; the present rule has only direct expenditure and the 1% limb. Interest on a loan taken specifically for an exempt-income investment is still caught as direct expenditure.
Is FY 2025-26 (AY 2026-27) under Section 14A of the 1961 Act or Section 14 of the 2025 Act?+
Section 14A of the Income-tax Act, 1961. The Income-tax Act, 2025 applies from 1 April 2026, so FY 2025-26 (AY 2026-27) is computed under Section 14A and Rule 8D and reported in Form 3CD; tax year 2026-27 is the first year under Section 14 and Form No. 26.

Authoritative sources

CBDT
Income-tax Act, 1961 — Section 14A — No deduction for expenditure incurred in relation to income not forming part of total income; the Assessing Officer applies the prescribed method where not satisfied with the claim; the Explanation inserted by the Finance Act 2022 applies the section even where no exempt income arose in the year.
CBDT
Income-tax Rules, 1962 — Rule 8D — Method for determining the expenditure: direct expenditure plus 1% of the annual average of the monthly averages of opening and closing investment balances, capped at total expenditure claimed (as substituted in June 2016).
Parliament
Income-tax Act, 2025 — Section 14 — Successor to Section 14A from tax year 2026-27; sub-section (3) applies the disallowance where the exempt income has not accrued, arisen or been received during the tax year.
CBDT
Income-tax Rules, 2026 — Rule 14 and Form No. 26 (rule 47) — Rule 14 is the prescribed method under the 2025 Act; clause 26 of Form No. 26 is where the tax auditor reports the inadmissible amount.
Always confirm against the latest version of the source. Regulations evolve and amendments are common.
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Last reviewed: 2026-10-01 · For informational purposes only — not professional advice.