Section 177
Section 177: limitation on interest deduction (thin capitalisation rule)
Section 177 is India's thin capitalisation rule - it caps how much interest an Indian company or a foreign company's Indian permanent establishment can deduct on debt owed to a non-resident associated enterprise, to stop profits being shifted out as excessive interest.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
The core limitation
Irrespective of anything else in the Act, expenditure by way of interest or similar payment in respect of "excess interest" is not deductible while computing income under "Profits and gains of business or profession", where:
- it is paid or payable by an Indian company or a foreign company's permanent establishment in India, on a debt issued by a non-resident associated enterprise; and
- the total of such expenditure in the tax year exceeds ₹1 crore.
When a debt is deemed issued by an associated enterprise
Where a lender who is not an associated enterprise has issued the debt, that debt is nonetheless deemed to have been issued by an associated enterprise if an associated enterprise has provided an implicit or explicit guarantee to the lender for that debt, or has deposited corresponding and matching funds with the lender.
Exclusions
Section 177 does not apply to:
- interest paid on a debt issued by a lender that is an Indian permanent establishment of a non-resident engaged in the banking business;
- an Indian company, or an Indian permanent establishment of a foreign company, engaged in the business of banking or insurance, or a Finance Company located in an International Financial Services Centre, or such class of non-banking financial companies as the Central Government notifies.
How "excess interest" is calculated
"Excess interest" means the total interest paid or payable in excess of 30% of the borrower's EBITDA (earnings before interest, taxes, depreciation and amortisation) for the tax year, or the interest paid/payable to associated enterprises for that year - whichever is less.
Carry forward of disallowed interest
Interest expenditure not fully deducted in a tax year because of this cap is carried forward to the following year(s), and allowed as a deduction against business profits in those years, up to the maximum allowable interest expenditure for that year as computed under sub-section (4).
This carry-forward is limited to eight tax years immediately succeeding the year in which the excess interest was first computed.
Key definitions
"Debt" means any loan, financial instrument, finance lease, financial derivative, or arrangement giving rise to interest, discounts or other finance charges deductible under "Profits and gains of business or profession". "Finance Company" has the meaning under the IFSCA (Finance Company) Regulations, 2021, subject to prescribed conditions and activities. "Permanent establishment" has the meaning assigned in Section 173(c).
Frequently asked questions
What is the interest deduction cap under Section 177?
Interest paid/payable to a non-resident associated enterprise in excess of 30% of the borrower's EBITDA for the year (or, if lower, the interest paid/payable to associated enterprises that year) is not deductible, but only where total such expenditure in the year exceeds ₹1 crore.
Can disallowed interest be claimed in a later year?
Yes - it can be carried forward and deducted against business profits in later years, subject to the same annual cap, for up to eight tax years immediately following the year the excess interest was first computed.
Are banks and insurers covered by this cap?
No - Indian companies or Indian permanent establishments engaged in banking or insurance, Finance Companies in an International Financial Services Centre, and notified classes of non-banking financial companies are excluded, as are debts from a non-resident bank's Indian permanent establishment.
Related sections
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Review your interest deduction position with our tax teamLast updated 9 September 2026