Imagine you invest money in shares that may generate tax-free income. You pay investment management fees, professional charges, or other related expenses. However, you receive no tax-free income during the year.
Can you use these expenses to reduce the tax payable on your salary or business income?
The answer is generally no. Section 14 of the Income-tax Act, 2025, restricts deductions for expenses related to income that does not form part of your total taxable income. It also allows the Assessing Officer to determine the related expenditure under the prescribed method if the taxpayer’s claim is not satisfactory.
Importantly, this provision can apply even when the related tax-exempt income has not accrued, arisen, or been received during the tax year.
In this article, we explain Section 14 in simple terms, with practical examples and a case study involving ABC Ltd.
1. What Is Section 14 of the Income-tax Act, 2025?
Section 14 deals with income that does not form part of total income and the expenses related to that income.
The main objective is to prevent taxpayers from using expenses incurred to earn tax-exempt income to reduce their taxable income.
Section 14 contains three important provisions.
| Provision | What It Means |
| Section 14(1) | No deduction is allowed for expenditure related to income that does not form part of total income. |
| Section 14(2) | If the Assessing Officer is not satisfied with the taxpayer’s expense claim or claim that no expenses were incurred, the officer determines the expenditure under the prescribed method. |
| Section 14(3) | The provision can apply even if the related exempt income has not accrued, arisen, or been received during that tax year. |
These rules mean that taxpayers cannot automatically claim expenses against taxable income simply because the related exempt income was not received.
2. Can You Claim Expenses Related to Tax-Free Income?
Section 14(1) establishes the basic rule: expenditure related to income that does not form part of total income cannot be claimed as a deduction while computing total income.
For example, an investor may hold shares that generate exempt income under the applicable tax provisions. The investor may incur expenses for managing those investments.
If the expenses relate to exempt income, the taxpayer cannot automatically deduct them from taxable salary, business profits, or other taxable income.
Example: Investment Management Expenses
Suppose Mr. Verma has the following income and expenses during a tax year:
| Particulars | Amount |
| Taxable salary income | ₹12,00,000 |
| Expenses related to investments generating exempt income | ₹40,000 |
| Tax-exempt income received | ₹0 |
Mr. Verma cannot automatically deduct the ₹40,000 investment-related expenses from his salary income merely because he received no exempt income during the year.
The tax treatment depends on the relationship between the expenditure and exempt income, the applicable provisions, and the prescribed method for determining the expenditure.
3. What If You Claim That No Expenses Were Incurred?
Sometimes, taxpayers may argue that they did not incur any expenditure related to their exempt income.
Section 14(2) addresses this situation.
If the Assessing Officer examines the taxpayer’s accounts and is not satisfied with either:
- The correctness of the expenditure claimed; or
- The claim that no expenditure was incurred in relation to exempt income,
the officer must determine the amount of expenditure according to the prescribed method.
This means a taxpayer’s statement that no expenses were incurred does not automatically prevent a disallowance.
Example
Suppose a company holds investments that may generate exempt income. The company claims that it did not incur any expenses related to those investments.
During an assessment, the Assessing Officer reviews the accounts and finds that certain expenses may relate to managing those investments.
If the officer is not satisfied with the company’s explanation, the expenditure may be determined under the prescribed method.
The company should therefore maintain accurate accounts and supporting documents to explain how its expenses relate to taxable and exempt income.
4. Does Section 14 Apply When No Exempt Income Is Received?
Yes. Section 14(3) expressly addresses this situation.
The provision applies when expenditure is incurred during a tax year in relation to income that does not form part of total income, even if that income has not accrued, arisen, or been received during that year.
In simple terms, the absence of exempt income in a particular year does not, by itself, guarantee that related expenses will be deductible.
Example: Shares That Generate No Dividend During the Year
Suppose a company invests in shares that may generate tax-exempt dividend income.
During the tax year:
- The company holds the shares.
- It incurs expenses related to managing the investments.
- It receives no dividend income.
The company may argue that no disallowance should apply because it earned no dividend income.
However, Section 14(3) makes it clear that the provision can apply even when the related exempt income has not been received or accrued during the year.
If the Assessing Officer is also not satisfied with the company’s claim regarding the expenditure, Section 14(2) provides for determining the expenditure under the prescribed method.
The actual amount of any disallowance depends on the relevant facts and applicable rules.
5. Case Study: ABC Ltd. Claims ₹2 Lakh in Investment Expenses
Let us understand how Section 14 may apply to a company with taxable business profits but no exempt dividend income during the year.
Case Details
ABC Ltd. invests in shares that may generate tax-exempt dividend income.
During the tax year, the company reports the following figures:
| Particulars | Amount |
| Taxable business profit before considering the investment-related expense | ₹50,00,000 |
| Expenses related to managing investments | ₹2,00,000 |
| Dividend income received during the year | ₹0 |
ABC Ltd. claims that since it has not received any dividend income, the investment-related expenses should not be disallowed.
What Can the Assessing Officer Do?
The Assessing Officer examines the company’s accounts and evaluates its claim.
Under Section 14(2), if the officer is not satisfied with the correctness of the expenditure claim—or with the company’s claim that no expenditure was incurred—the officer determines the relevant expenditure under the prescribed method.
Section 14(3) also allows the provision to apply even though no dividend income accrued, arose, or was received during the tax year.
Therefore, the absence of dividend income does not automatically prevent a disallowance.
Does This Mean the Entire ₹2 Lakh Will Be Disallowed?
Not necessarily.
The ₹2 lakh represents the expenses reported by ABC Ltd. It does not automatically establish the final amount disallowed under Section 14.
The amount must be determined according to the applicable prescribed method and the relevant facts, including the nature of the expenditure and the investment details.
For illustration, if ₹X is determined to be the disallowable expenditure, that amount would not be available as a deduction against taxable income under the applicable computation rules.
The final tax impact would depend on the company’s complete tax computation and other applicable provisions.
6. How Can the Assessing Officer Determine the Expenses?
Section 14(2) requires the Assessing Officer to determine the expenditure in accordance with the prescribed method when the taxpayer’s claim is not satisfactory.
The Income-tax Rules, 2026 prescribe a method for determining expenditure related to income that does not form part of total income. Broadly, the method includes:
- Direct expenditure: Expenses directly related to income that does not form part of total income.
- Investment-related amount: An amount calculated at 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments whose income does not, or will not, form part of total income.
The prescribed method and its application should be checked against the relevant rules and the taxpayer’s circumstances. The amount should not be assumed to equal the total investment expenses claimed by the taxpayer.
This makes accurate accounting important for companies and individuals holding investments that may generate exempt income.
7. Important Points Taxpayers Should Remember
Before claiming expenses related to investments or other income that may be exempt from tax, keep the following points in mind:
- Tax-exempt income and related expenses: Expenses related to income that does not form part of total income are generally not deductible under Section 14.
- No income received: The absence of exempt income during the year does not automatically make related expenses deductible.
- Claiming zero expenditure: The Assessing Officer may determine expenditure under the prescribed method if the officer is not satisfied with the taxpayer’s claim that no expenses were incurred.
- Maintain supporting records: Keep investment statements, expense ledgers, invoices, and relevant explanations of how expenses were incurred.
- Separate taxable and exempt income: Proper records can help establish which expenses relate to taxable activities and which relate to exempt income.
- Review the prescribed rules: The actual amount determined depends on the applicable method and facts of the case.
Taxpayers should review the relevant statutory provisions and rules before finalising their tax computations.
Conclusion
Section 14 of the Income-tax Act, 2025, makes an important distinction between taxable income and income that does not form part of total income.
Expenses related to exempt income generally cannot be used to reduce taxable income. The rule can apply even when the related exempt income is not received during the tax year.
The Assessing Officer may also determine the expenditure under the prescribed method if the taxpayer’s explanation or claim is not satisfactory.
For individuals, investors, and businesses, the practical approach is to maintain clear investment and expense records, understand the applicable rules, and avoid claiming deductions without checking whether the related income forms part of total income.
Frequently Asked Questions
1. What is Section 14 of the Income-tax Act, 2025?
Section 14 deals with income that does not form part of total income and the expenditure related to such income. It generally does not allow a deduction for expenses incurred in relation to that income.
2. Can I claim expenses related to tax-free income against my salary?
Generally, no. Expenses related to income that does not form part of total income cannot automatically be deducted against salary or other taxable income under Section 14.
3. Can the Assessing Officer disallow expenses if no exempt income was received?
Yes. Section 14(3) states that the provision can apply even if the related exempt income has not accrued, arisen, or been received during the tax year. The amount of expenditure must be determined according to the applicable rules and facts.
4. What happens if I claim that I incurred no expenses?
If the Assessing Officer is not satisfied with the claim, having regard to the taxpayer’s accounts, Section 14(2) requires the officer to determine the expenditure according to the prescribed method.
5. Will the entire investment-related expense always be disallowed?
Not necessarily. The amount determined under the prescribed method may differ from the total expenditure claimed. The treatment depends on the facts, the applicable rules, and the nature of the expenses.
6. Does Section 14 apply to companies?
Yes. Section 14 applies when computing total income under the relevant provisions, and its requirements are not limited to individual taxpayers. Companies such as ABC Ltd. may also need to consider the provision when holding investments that generate or may generate exempt income.
7. What records should taxpayers maintain?
Taxpayers should maintain investment statements, expense records, invoices, account ledgers, and supporting explanations that identify the purpose of expenditure and its connection with taxable or exempt income.
