Section 94B interest limitation: the 30% of EBITDA cap, with an example

The cap applies when all of these are true:

• the borrower is an Indian company, or a permanent establishment in India of a foreign company
• the interest, or a similar payment, is on debt issued by a non-resident associated enterprise
• that interest is claimed as a business deduction
• the total of such interest in the year is more than ₹1 crore

"Debt" is wide. It covers loans, financial instruments, finance leases, financial derivatives and any arrangement that gives rise to deductible interest, discounts or other finance charges.

A loan from an unrelated lender is treated as issued by an associated enterprise if the associated enterprise gave the lender an implicit or explicit guarantee, or deposited matching funds with the lender. A loan from a foreign bank backed by a parent company guarantee is the typical case.

The disallowed amount, called excess interest, is the lower of:

• total interest paid or payable in excess of 30% of the borrower's EBITDA for the year; and
• the interest paid or payable to associated enterprises for that year.

The section does not define how EBITDA is to be computed. Most taxpayers take it from the audited profit and loss account and keep the working on file, so the method is consistent from year to year.

₹2 crore of the interest is not deductible this year. The other ₹3 crore, including ₹2 crore of the parent's interest, is allowed as usual.

Interest disallowed in a year is carried forward and allowed in later years, to the extent there is room under the 30% of EBITDA limit in those years. It cannot be carried forward for more than eight tax years after the year in which it was first computed. A company whose EBITDA is growing will usually use it up; a loss-making company may lose it.

• interest on debt from a lender that is the Indian permanent establishment of a non-resident bank
• Indian companies and permanent establishments in the business of banking or insurance
• finance companies located in an International Financial Services Centre
• classes of non-banking financial companies notified by the Central Government

The two tests run one after the other. First the interest rate itself must be at the arm's length price: an above-market rate on a loan from the parent is cut down under the transfer pricing rules. Then the 30% of EBITDA cap applies to the interest that survives. Our safe harbour rules guide gives the safe harbour spreads for intra-group loans, which settle the rate question for loans given by an Indian company.

The interest also has to be reported in Form 3CEB as an international transaction, and tax has to be withheld on it when it is paid abroad.

• The loan agreements and any guarantee or deposit arrangements with lenders
• The EBITDA working, reconciled to the audited accounts, with the method stated
• A schedule of interest by lender, split between associated enterprises and others
• A carry-forward register showing the year each disallowed amount arose and when it was used
• The arm's length support for the interest rate, and the Form 15CA/15CB filed for each payment

The return carries the disallowance and the carry-forward forward each year, so an error in one year repeats until it is corrected.

From tax year 2026-27 the rule is section 177 of the Income-tax Act, 2025, with the same ₹1 crore threshold, the same 30% of EBITDA test, the same exclusions and the same eight-year carry-forward.

Planning points: funding a subsidiary with equity instead of debt, keeping group debt within the 30% headroom, and borrowing locally without a parent guarantee all reduce exposure. Each has FEMA and commercial consequences, so model them before changing the structure. See our transfer pricing services for the s.94B working, priced at ₹4,999.