Section 35 · Computation of total income
Section 35 of the Income-tax Act, 2025 — Amounts Not Deductible (TDS Default, Taxes & Partner Remuneration Limits)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter IV
📜 What the law says — Section 35, Income-tax Act 2025
35. Irrespective of any other provision of Chapter IV-D, the following amounts
shall not be allowed as deduction in computing the income chargeable under
the head “Profits and gains of business or profession”:—
(a) any amount on account of—
(i) tax paid on income; or
(ii) tax paid by employer referred to in Schedule III (Table: Sl. No. 10);
or
(iii) tax paid in any other country for which relief is eligible under
section 159 or 160,
and shall include any surcharge or cess on such tax, by whatever name
called;
(b) (i) 30% 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), so, however, that—
(A) where in respect of any such sum, tax is deducted in any
subsequent year, or is deducted during the tax year but paid
after the due date specified in section 263(1), 30% of such sum
shall be allowed as a deduction in computing the income of
the tax year, in which such tax has been paid;
(B) where the assessee is required to and fails to deduct whole or
any part of the tax under Chapter XIX-B on any such sum but
he is not deemed to be an assessee in default under section
398(2), then for the purposes of this sub-clause, the assessee
shall be deemed to have deducted and paid the tax on such
sum on the date on which the return has been filed by the
payee referred to in section 398(2);
(ii) any interest, royalty, fees for technical services or other sum charge-
able under this Act which is payable—
(A) outside India; or
(B) in India to a non-resident (which is not a company) or to a
foreign company,
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), so, however, that —
(I) where in respect of any such sum, tax is deducted in any sub-
In plain language
What Section 35 actually deals with
There is a common and costly confusion here, so read this first. Under the old Income-tax Act, 1961, "Section 35" was the famous provision for scientific research deductions. Under the new Income-tax Act, 2025 (effective 1 April 2026), the numbering has been completely reorganised. Section 35 of the 2025 Act is now titled "Amounts not deductible in certain circumstances" — it is a disallowance section, not a benefit section. The scientific-research deduction has moved to Section 45 of the 2025 Act.
Section 35 essentially carries forward what taxpayers knew as Section 40 of the 1961 Act (mainly 40(a) and 40(b)). It lists expenses that a business or professional has genuinely paid but which the law refuses to allow as a deduction while computing "Profits and gains of business or profession", usually because of a compliance failure.
Who it applies to
- Every person computing income under the head "Profits and gains of business or profession" — proprietors, professionals, firms, LLPs, companies, AOPs and BOIs.
- It applies irrespective of any other provision of the business-income chapter (a non-obstante override), so even if an expense is otherwise deductible, Section 35 can still knock it out.
The main disallowances
- Income-tax, surcharge and cess: Any income-tax paid on business profits (and the surcharge/cess on it) is not deductible. Foreign taxes for which relief is available under the double-tax relief provisions are also not deductible.
- TDS default on payments to residents — 30% disallowed: If tax was deductible at source on a payment to a resident (interest, commission, rent, professional fees, contractor payments, etc.) and you did not deduct TDS, or deducted but did not deposit it by the due date for filing the return, then 30% of that expense is disallowed.
- TDS default on payments to non-residents — 100% disallowed: For interest, royalty, fees for technical services or any other sum chargeable to tax paid to a non-resident or paid outside India, failure to deduct/deposit TDS leads to 100% (the full amount) being disallowed — far harsher than the resident rule.
- Salary paid outside India / to a non-resident without TDS: Disallowed if tax was not deducted or paid.
- Provident/welfare fund payments: Payments to an unapproved fund, or where the employer has not arranged for tax deduction on taxable payments out of the fund, are disallowed.
- Equalisation levy default: Consideration for specified online/e-commerce services where the equalisation levy was deductible but not deducted/paid is disallowed until paid.
Partner remuneration and interest limits (firms and LLPs)
Section 35 also caps what a firm/LLP can deduct for payments to its partners (the old Section 40(b) rule):
- Remuneration must be to a working partner and authorised by the partnership deed. Remuneration to a non-working partner, or for a period before the deed provided for it, is fully disallowed.
- Ceiling on working-partner remuneration: On the first ₹6,00,000 of book profit (or ₹3,00,000 where there is a loss), or 90% of book profit — whichever is higher — the deduction is allowed up to that amount; on the balance of book profit, 60% is allowed.
- Interest to partners is capped at 12% per annum simple interest; anything above 12% is disallowed.
The relief: pay it later, claim it later
The TDS disallowances are not permanent. Where an amount is disallowed because TDS was not deducted/paid, the same amount becomes deductible in the later year in which the tax is finally deducted and deposited. So a Section 35 disallowance is often a timing (deferral) hit rather than a total loss — but it still costs interest and cash flow.
Practical implications
- Deduct and deposit TDS on time — the single biggest cause of Section 35 disallowance is late or missed TDS.
- The non-resident 100% disallowance is a trap for royalty/software/technical-fee payments abroad; get TDS and the 15CA/15CB compliance right.
- Firms should draft the partnership deed carefully so partner salary and interest stay within the ₹6,00,000/90%/60% and 12% limits.
- Do not confuse this with scientific-research relief — for R&D, look at Section 45 of the 2025 Act instead.
💡 Example
Example 1 — Resident TDS default (30% rule). Rajesh runs a trading firm and pays ₹5,00,000 as brokerage to a resident agent, on which TDS was deductible but he forgot to deduct it and the year closed without deposit. Under Section 35, 30% of ₹5,00,000 = ₹1,50,000 is disallowed and added back to his taxable profit. If he deducts and deposits the TDS in the next year, that ₹1,50,000 becomes deductible in that later year.
Example 2 — Non-resident payment (100% rule). A software company pays ₹20,00,000 as royalty to a foreign company but does not deduct TDS. Because the payee is a non-resident, the entire ₹20,00,000 is disallowed (not just 30%). Its taxable profit jumps by ₹20 lakh — a ₹5,00,000+ extra tax hit at 25% — purely due to a compliance slip.
Relatable story. Meera, a young CA, took over her family manufacturing firm's accounts. The books looked clean, but at assessment ₹8 lakh of expenses were added back under Section 35 because rent and contractor TDS had been deposited three months late. Her uncle protested that "the money was genuinely spent". True — but Section 35 doesn't care that the expense was real; it cares whether the compliance was done on time. Meera set up an automated TDS calendar the next year, and the disallowance never repeated.
| Type of payment / item | Trigger for disallowance | Amount disallowed under Section 35 |
|---|
| Payment to a resident (interest, rent, commission, fees, contractor, etc.) | TDS not deducted, or deducted but not deposited by return due date | 30% of the expense |
| Interest/royalty/fees/other sum to a non-resident or paid outside India | TDS not deducted or not deposited in time | 100% (full amount) |
| Income-tax, surcharge, cess on business profit | Always | 100% (not deductible) |
| Salary paid outside India / to non-resident without TDS | TDS not deducted/paid | 100% |
| Partner remuneration (firm/LLP) | Exceeds statutory ceiling or paid to non-working partner | Excess over ceiling / whole amount to non-working partner |
| Interest to partners | Rate exceeds 12% p.a. | Interest above 12% p.a. |
Related sections
Section 45 — Expenditure on scientific research (old Section 35 of 1961 Act) Section 34 — General deductions allowable for business/profession Section 37 — Certain payments only on actual payment (old Section 43B) Section 263 — Due date for depositing TDS referred to in Section 35 Section 47 — Expenditure on agricultural extension and skill development projects Section 44 — Depreciation allowance on business assets
Frequently asked questions
Is Section 35 of the 2025 Act about scientific research like the old Section 35?
No. Under the Income-tax Act, 2025, Section 35 is titled 'Amounts not deductible in certain circumstances' and deals with disallowances (the old Section 40). The scientific research deduction has shifted to Section 45 of the 2025 Act.
How much is disallowed if I miss TDS on a payment to a resident?
30% of that expense is disallowed for the year. The disallowed 30% becomes deductible in the later year in which you finally deduct and deposit the TDS.
Why is the disallowance 100% for foreign payments but only 30% for residents?
For payments to non-residents or amounts paid outside India (interest, royalty, technical fees, etc.), the law disallows the entire amount to strongly enforce TDS, since recovering tax from a non-resident later is difficult.
Can I ever get back an amount disallowed under Section 35?
Yes, for TDS-related disallowances. Once the tax is deducted and deposited in a subsequent year, the same amount is allowed as a deduction in that later year, so it is usually a timing loss, not a permanent one.
What are the limits on paying salary to partners in a firm?
On the first ₹6,00,000 of book profit (or ₹3,00,000 in a loss) or 90% of book profit, whichever is higher, plus 60% of the balance book profit. Interest to partners is capped at 12% per annum.
Is income-tax paid on profits deductible as a business expense?
No. Income-tax, surcharge and cess on your business profits are specifically not deductible under Section 35, along with foreign taxes for which double-tax relief is available.
Which old provision does Section 35 of the 2025 Act correspond to?
It broadly corresponds to Section 40 of the Income-tax Act, 1961 — particularly 40(a) (TDS and tax defaults) and 40(b) (partner remuneration and interest limits).
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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