Chapter IV - Computation of Total Income
Section 14
Section 14: income not forming part of total income and expenditure in relation to such income
Section 14 stops taxpayers from claiming a double benefit - getting an income item exempted from tax under Section 11 (or elsewhere) while also deducting the expenses incurred to earn that exempt income against their taxable income. It also gives the Assessing Officer a mechanism to work out the disallowable expenditure where the taxpayer's own figures aren't convincing.
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Need advice on Section 14?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Irrespective of anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income.
(2) Where the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with— (a) the correctness of the claim of expenditure incurred by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under this Act, he shall determine such amount of expenditure in accordance with any method, as may be prescribed.
(3) Irrespective of anything to the contrary contained in this Act, the provisions of this section shall apply in a case where any expenditure has been incurred during any tax year in relation to income which does not form part of the total income under this Act, but such income has not accrued or arisen or has not been received during that tax year.
Introduction
The question is whether an expense relates to income kept outside total income, not merely whether an exempt receipt appeared in the same year. The accounts and prescribed determination method matter when the Assessing Officer disputes the claim.
Key takeaways
Exempt-income expenses
Expenditure incurred in relation to income outside total income is not deductible when total income is computed under this Chapter.
Assessing Officer's determination
If the Assessing Officer is dissatisfied with the taxpayer's expenditure claim, or a claim that no expense was incurred, the amount is determined by the prescribed method after considering the accounts.
No exempt receipt required that year
The disallowance can apply even when the related exempt income has not accrued, arisen or been received in that tax year.
The core disallowance
Irrespective of any other provision of the Act, no deduction is allowed, in computing total income, for expenditure incurred by the assessee in relation to income which does not form part of total income (section 14(1)).
When the Assessing Officer can step in
If the Assessing Officer, having regard to the assessee's accounts, is not satisfied with the correctness of the assessee's claimed expenditure relating to exempt income, or with the assessee's claim that no such expenditure was incurred at all, the Assessing Officer determines the amount of such expenditure using a prescribed method (section 14(2)).
Applies even if the exempt income hasn't yet been received
Section 14(3) clarifies that this section applies even where expenditure was incurred in a tax year in relation to income that does not form part of total income, but that income has not actually accrued, arisen or been received in that tax year.
Step-by-step flow for applying Section 14
- 1
Has the assessee incurred expenditure in relation to income that does not form part of total income?
Section 14(3) applies even if that income has not accrued, arisen or been received in the tax year.
- No: Section 14 does not apply.
- Yes: Go to the next step.
- 2
Identify the related expenditure
Under Section 14(1), no deduction is allowed for such expenditure, irrespective of anything to the contrary in the Act.
- 3
Is the Assessing Officer satisfied with the assessee's claim, having regard to its accounts?
- Yes: The assessee's own identification of related expenditure stands.
- No: Go to the next step.
- 4
Determination by the prescribed method
Under Section 14(2), the Assessing Officer determines the related expenditure in accordance with the method prescribed. Section 14 itself does not state that method.
Practical checklist
Do
- Separate direct costs of excluded income from costs of taxable income in the accounts.
- Keep a documented basis for any claim that no expense relates to excluded income.
Avoid
- Do not assume Section 14 is irrelevant solely because the exempt receipt arose in a different year.
Illustrative example
Worked example: interest on a loan used for an exempt-income investment
Hypothetical facts (illustration only, not a real taxpayer): A trading company's expenses for a tax year total ₹5,00,000. This includes ₹30,000 of interest on a loan used only to buy an investment whose income does not form part of total income. The company claims that none of its other expenses relate to that investment. All figures are assumed.
Direct expenditure
The ₹30,000 interest is incurred in relation to income not forming part of total income, so Section 14(1) disallows it.
Balance on the company's claim
₹5,00,000 − ₹30,000 = ₹4,70,000 remains for examination under the usual deduction provisions.
Assessing Officer's review
If the Assessing Officer, having regard to the accounts, is not satisfied with the claim that no other expenditure relates to the investment, he determines the related expenditure by the prescribed method under Section 14(2).
No exempt income this year
Even if the investment yields no income in this tax year, Section 14(3) still applies to the related expenditure.
Outcome
- At least ₹30,000 is disallowed; any further disallowance depends on the prescribed method if the claim is not accepted.
- Keep records linking borrowings and expenses to the investments they fund.
Glossary
- Expenditure in relation to exempt income
- A cost connected with income excluded from total income, to which Section 14's deduction bar may apply.
Frequently asked questions
Can I deduct expenses incurred to earn tax-exempt income?
No - Section 14(1) specifically disallows any deduction for expenditure incurred in relation to income that does not form part of total income.
What if I claim I incurred no expenditure on exempt income at all?
If the Assessing Officer, based on your accounts, isn't satisfied with that claim (or with the amount you've claimed), the Assessing Officer can independently determine the disallowable expenditure using a method to be prescribed under the rules.
Does Section 14 apply if the exempt income was not earned in that year?
Yes. Section 14(3) applies the rule to expenditure incurred during a tax year in relation to income not forming part of total income, even if that income has not accrued, arisen or been received in that year.
Need help applying this provision to your situation?
Talk to our tax team about this sectionLast updated 9 October 2026