Section 36 · Computation of total income
Section 36 of the Income-tax Act, 2025 — Expenses or Payments Not Deductible in Certain Circumstances (Related-Party & Cash Disallowance)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter IV
📜 What the law says — Section 36, Income-tax Act 2025
36. (1) The provisions of this section shall have effect irrespective of anything to
the contrary contained in any other provision of this Act relating to compu-
tation of income under the head “Profits and gains of business or profession”.
(2) If the assessee incurs any expenditure for which payment has been or is to be
made to any “specified person”, which in the opinion of the Assessing Officer is
excessive or unreasonable having regard to the—
(a) fair market value of the goods, services or facilities; or
(b) legitimate needs of the business or profession of the assessee; or
(c) benefit derived by or accruing to the assessee therefrom,
so much of the expenditure as considered excessive or unreasonable by him shall
not be allowed as a deduction.
(3) For the purposes of sub-section (2) and this sub-section,—
(a) “specified person” shall mean the following,—
(i) in relation to an assessee mentioned in column B of the Table below,
the person referred to in column C thereof:—
TABLE
Sl. Assessee Specified person
No.
A B C
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 Member of the association or his relative.
persons.
5. Hindu undivided Member of the family or his relative;
family.
(ii) any person being an individual or company or firm or association
of persons or Hindu undivided family having substantial interest in
the business or profession of the assessee, or any director, partner,
member thereof or any relatives of such individual, director, part-
ner, member 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 substantial interest in the
business or profession of the assessee, or any directo
In plain language
What Section 36 is about
Section 36 of the Income-tax Act, 2025 is the main "anti-abuse" provision for the head Profits and Gains of Business or Profession (PGBP). It lists expenses and payments that a business or professional cannot claim as a deduction even if they are genuine business expenses. This section carries forward, in a single consolidated place, the rules that were earlier spread across Section 40A of the Income-tax Act, 1961 (chiefly Section 40A(2), 40A(3), 40A(7), 40A(9) and 40A(13)).
Section 36 opens with a non-obstante clause — its restrictions apply "irrespective of anything to the contrary" in any other provision of the Act. So even if an expense looks allowable under the general deduction rules, if it is hit by Section 36 the disallowance wins.
Who it applies to
- Every assessee earning income under PGBP — proprietors, partnership firms, LLPs, companies, HUFs and professionals — who maintains and claims business expenses.
- It matters most where payments are made to relatives, partners, directors or closely-connected concerns, or where large payments are made in cash.
The key disallowances
- Excessive or unreasonable payments to "specified persons": If you pay a related party (relative, partner, director, or a person/entity in which you have substantial interest) more than the fair market value of the goods, services or facilities, the Assessing Officer can disallow the excess portion. Only the unreasonable part is disallowed, not the whole payment.
- Cash payments above ₹10,000 in a day: Any expense where payment (or aggregate of payments) to one person in a single day exceeds ₹10,000 and is not made through an account-payee cheque, account-payee bank draft, or a specified banking/electronic/online mode is fully disallowed.
- Higher ₹35,000 limit for goods carriages: For payments made for plying, hiring or leasing of goods carriages (transporters/trucks), the ₹10,000 limit is read as ₹35,000.
- Deemed profit on cash payment of an earlier liability: If you claimed a deduction for a liability in one year, and in a later year you pay it in cash beyond the limit, that payment is treated as your income (deemed profit) of the year of payment.
- Marked-to-market and expected losses: Notional/anticipated losses (marked-to-market or other expected losses) are not deductible, except where specifically allowed under the depreciation-related provision of the Act.
- Contributions to non-statutory / unapproved funds and unapproved gratuity provisions: Payments to an unrecognised welfare fund, or a mere provision for gratuity not paid to an approved gratuity fund or not actually paid to employees, are disallowed.
Who is a "specified person" (related party)
- For an individual — any relative (spouse, brother, sister, lineal ascendants and descendants).
- For a company, firm, HUF or AOP — its director, partner or member, and their relatives.
- Any person or entity in which the assessee (or a relative) holds a substantial interest, generally meaning 20% or more of voting power (company) or 20% of profits (other entities).
How it interacts with other provisions
- General deductions: Section 36 overrides the general allowance rules — an otherwise valid expense is knocked out if disallowed here.
- Depreciation: The bar on marked-to-market/expected losses is subject to the specific depreciation provision.
- Presumptive taxation: Businesses opting for presumptive schemes generally do not separately face these disallowances, since income is estimated at a flat rate.
Practical implications
- Route all payments above ₹10,000 (₹35,000 for transporters) through banking or digital channels — UPI, NEFT/RTGS, account-payee cheque, cards.
- Keep fair-value evidence (quotations, comparables) for payments to relatives and group concerns.
- Do not settle a previously-claimed liability in cash in a later year — it becomes taxable income.
- Fund gratuity through an approved gratuity fund to secure the deduction.
💡 Example
Example 1 — Cash payment disallowance. Ramesh runs a garment trading firm. On 15 May 2026 he pays a supplier ₹48,000 in cash for fabric. Because the single-day cash payment to one person exceeds ₹10,000 and was not made through banking/online mode, the entire ₹48,000 is disallowed under Section 36. If his firm is in the 30% bracket, this adds roughly ₹14,400 (plus cess) to his tax. Had he paid by UPI or account-payee cheque, the full ₹48,000 would have been deductible.
Example 2 — Excessive payment to a relative. Priya's private company pays her brother ₹12,00,000 a year as a "consultant." The fair market value of similar consultancy is ₹7,00,000. The Assessing Officer can treat ₹5,00,000 as excessive and disallow only that ₹5,00,000; the reasonable ₹7,00,000 remains deductible. This is Section 36's related-party test carried over from old Section 40A(2).
A relatable story. Suresh, a truck operator, hired a lorry for ₹30,000 and paid the driver-owner in cash. He panicked, remembering the ₹10,000 rule. His CA reassured him: for plying, hiring or leasing of goods carriages the limit is ₹35,000, so his ₹30,000 cash payment was safe. But the next month he paid ₹40,000 cash for the same purpose — that one crossed ₹35,000 and was fully disallowed. The lesson: know both thresholds and use bank/digital payments to be safe.
| Situation | Threshold / Rule | Consequence under Section 36 |
|---|
| Cash payment for a single expense to one person in a day (general) | More than ₹10,000 | Entire payment disallowed |
| Cash payment for plying, hiring or leasing of goods carriages | More than ₹35,000 | Entire payment disallowed |
| Payment through account-payee cheque / draft / banking or online mode | Any amount | Allowed (no cash disallowance) |
| Payment to a specified/related person | Above fair market value | Only the excessive/unreasonable portion disallowed |
| Earlier-claimed liability paid in cash in a later year (above limit) | More than ₹10,000 (₹35,000 for goods carriage) | Treated as deemed profit / income of the payment year |
| Marked-to-market or expected (notional) loss | Not actually incurred | Not deductible (except as specifically allowed) |
| Substantial interest (defining a related party) | 20% or more voting power / profits | Person becomes a "specified person" |
Related sections
Section 26 — General deductions for business or profession Section 33 — Amounts not deductible (interest, tax, salary paid outside India without TDS) Section 35 — Certain deductions allowed only on actual payment Section 32 — Depreciation and related allowances Section 28 — Expenses expressly allowed as deductions Section 40A — Deductions related to employee welfare
Frequently asked questions
What is the cash payment limit under Section 36 of the Income-tax Act, 2025?
A cash payment (or aggregate of payments) to a single person in one day for a business expense must not exceed ₹10,000; above that it is fully disallowed. For plying, hiring or leasing of goods carriages the limit is ₹35,000.
Which old section does Section 36 of the 2025 Act replace?
It carries forward the disallowance rules of Section 40A of the Income-tax Act, 1961 — mainly 40A(2) on excessive related-party payments, 40A(3) on cash payments, 40A(7) on gratuity, 40A(9) on non-statutory funds, and 40A(13) on notional losses.
If I pay ₹15,000 to a relative for genuine services, is it disallowed?
Not automatically. Only the portion that exceeds the fair market value of the services is disallowed. If ₹15,000 is reasonable for the work, it stays fully deductible; if fair value is ₹10,000, then ₹5,000 can be disallowed.
Does paying by UPI or bank transfer avoid the cash disallowance?
Yes. Payments made through account-payee cheque, account-payee bank draft, or a specified banking/electronic/online mode (like UPI, NEFT, RTGS, cards) are not hit by the cash-payment disallowance, regardless of amount.
What happens if I pay an old expense in cash in a later year?
If a deduction was allowed for a liability earlier and you later pay it in cash beyond the ₹10,000/₹35,000 limit, that cash payment is treated as your business income (deemed profit) in the year you pay it.
Who counts as a 'specified person' for the related-party test?
Relatives of the individual, directors/partners/members of a company, firm or HUF and their relatives, and any person or entity in which the assessee holds a substantial interest — generally 20% or more of voting power or profits.
Are marked-to-market losses deductible under Section 36?
No. Marked-to-market and other expected (notional) losses that have not actually crystallised are not deductible, except to the extent specifically allowed under the depreciation-related provision of the Act.
Is a mere provision for gratuity deductible?
A mere provision for gratuity is generally disallowed. To claim it, the contribution must be made to an approved gratuity fund or the gratuity must actually be paid or become payable to employees.
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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