Thin-capitalisation interest limitation (BEPS)

Interest paid by an Indian company / PE to a NON-RESIDENT associated enterprise (AE) is capped at 30% of EBITDA. Excess is disallowed but carries forward 8 years. Triggers only if total interest to AEs exceeds ₹1 Cr in the year.

Key points

• §94B implements the OECD BEPS Action 4 thin-cap rule.
• It applies to an Indian company or a PE of a foreign company that pays INTEREST (or similar consideration on debt) of ₹1 crore or MORE in aggregate to a NON-RESIDENT associated enterprise (AE) — including a third-party loan where the AE provides an implicit / explicit guarantee or matching deposit.
• The DEDUCTION is capped at the LOWER of (a) actual interest paid to AE, or (b) 30% of EBITDA (earnings before interest, tax, depreciation and amortisation, computed on Indian tax basis).
• The DISALLOWED excess can be CARRIED FORWARD for up to EIGHT subsequent assessment years and set off against future EBITDA headroom.
• EXCLUDED: (i) banking and insurance businesses;
• (ii) NBFCs as notified by CBDT.
• §94B does NOT apply to interest paid to UNRELATED RESIDENT lenders.
• The provision overlays the existing transfer-pricing arm's-length test under §92 — both apply concurrently, and the more restrictive result governs.

Reference: §94B, ITA 1961 (Finance Act 2017) — under ITA 2025 (FY 26-27 onwards), this is §177