Tax Laws and Practice · Incomes which do not form part of Total Income

Expenditure Related to Exempt Income under Section 14

Updated 11 October 2026 · Fact-checked

Section 14 of the Income-tax Act, 2025 says no deduction is allowed for expenditure incurred in relation to income that does not form part of total income. If the Assessing Officer doubts your claim, he determines the expenditure by a prescribed method. To solve a question, identify the exempt income, find the related expense, and add it back.

Understand Expenditure Related to Exempt Income (Section 14)

Some incomes are kept out of total income, such as exempt receipts. You pay no tax on them. Now think about the cost of earning them. If that cost were allowed against your taxable income, you would get a tax benefit on money that is itself tax-free. Section 14 stops this.

Section 14(1) says that, irrespective of anything to the contrary in the Act, no deduction is allowed for expenditure incurred by the assessee in relation to income which does not form part of the total income. The idea is simple: no tax on the income means no deduction for its cost.

The hard part in practice is a mixed expense. A company may pay one salary bill or one interest bill for both taxable and exempt activities. The assessee may claim a number, or may claim that no expense was incurred at all. Under section 14(2), if the Assessing Officer, having regard to the accounts, is not satisfied with the correctness of the expenditure claimed, or with the claim that no expenditure was incurred, he determines the amount by a method that may be prescribed.

Section 14(3) closes a timing gap. The disallowance applies even where the expenditure is incurred in a tax year but the exempt income has not accrued, arisen or been received in that same tax year. So you cannot argue that no exempt income came this year and therefore the expense stays deductible.

In short, the section works in three layers: the main bar (14(1)), the power to fix the amount when the claim is doubtful (14(2)), and the no-income-this-year rule (14(3)). The prescribed method itself is not in the text supplied here, so in an answer state that the method is as prescribed and do not invent a percentage.

Key rules to remember

Main rule: Expenditure in relation to income not forming part of total income → no deduction; Section 14(1). It applies irrespective of anything to the contrary in the Act.
Adjustment in computation: Taxable business income = Profit as per books + Expenditure relating to exempt income − Exempt income credited to P&L; A practical way to apply the rule. The exempt income credited is removed, and its related expense is added back.
Doubtful claims: If AO is not satisfied with the claimed expenditure, or with a claim of nil expenditure → AO determines the amount by the prescribed method; Section 14(2)(a) and (b). The method is as prescribed.
Timing rule: Disallowance applies even if exempt income has not accrued, arisen or been received in that tax year; Section 14(3). Expenditure is still incurred in relation to exempt income.

How to solve Expenditure Related to Exempt Income (Section 14) questions

Use this order for any question on expenditure related to exempt income.

1List every income in the question and mark which ones do not form part of total income.
2List every expense and decide whether it is directly linked to the exempt income, directly linked to taxable income, or common to both.
3Disallow the directly linked expenses of exempt income in full under section 14(1).
4For common expenses, check whether the question gives a basis or a figure. If it does, apply it. If not, say the amount is determined as per the prescribed method.
5Check section 14(3): if no exempt income was received this year, the expenditure is still disallowed.
6Add back the disallowed expenditure to book profit and deduct the exempt income already credited, then compute the taxable figure.
7Write a conclusion: name the section, state the amount disallowed and the resulting income.

Quickest way: Add back and remove method

When to use it: Use it for numerical questions where a profit figure is given and exempt income is already credited in it.

Start with net profit as per the books.
Add the expenditure relating to exempt income.
Subtract the exempt income credited to the profit and loss account.
Make other adjustments the question asks for.
State the section 14 basis in one line before the figure.

Common mistakes in Expenditure Related to Exempt Income (Section 14)

Allowing the expense because the exempt income was not earned this year.
Students think the link between the expense and the income needs current-year receipt.
Fix: Remember section 14(3): the bar applies even if the income has not accrued, arisen or been received in that tax year.
Removing the exempt income but forgetting to add back its expenses.
The exempt income stands out in the question, while the expense is hidden among other items.
Fix: Always do both sides: subtract the exempt income and add back the related expense.
Disallowing every common expense in full.
Students overread the section as covering all expenses of the assessee.
Fix: Only expenditure in relation to exempt income is barred. Expenses of taxable activities stay allowable, subject to the other rules.
Inventing a percentage or formula for apportionment.
Students recall rules from the old law or from other sources.
Fix: Section 14(2) says the AO uses a method as may be prescribed. Apply any basis given in the question, otherwise say the prescribed method applies.
Treating a nil-expense claim as final.
Students assume the assessee's statement always stands.
Fix: Under section 14(2)(b), if the AO is not satisfied with the claim that no expenditure was incurred, he determines the amount by the prescribed method.

Worked examples

Example 1

Ravi Textiles Ltd has net profit of ₹18,00,000 as per its books. This is after crediting exempt income of ₹2,00,000. Expenditure of ₹30,000 was incurred directly in earning that exempt income and was debited to the profit and loss account. Ignoring all other adjustments, compute the business income.

Show the solution

Start with book profit: ₹18,00,000.
Section 14(1) bars deduction of the ₹30,000 incurred in relation to exempt income, so add it back: ₹18,00,000 + ₹30,000 = ₹18,30,000.
The exempt income of ₹2,00,000 does not form part of total income, so deduct it: ₹18,30,000 − ₹2,00,000 = ₹16,30,000.

Answer: Business income is ₹16,30,000. The ₹30,000 expense is disallowed under section 14(1), and the ₹2,00,000 exempt income is excluded.

Example 2

Meera Foods Pvt Ltd claims that it incurred no expenditure for earning an exempt income of ₹1,00,000. Its accounts show that staff worked on managing the investment that produced it. No exempt income was received in the current tax year, but the company paid ₹15,000 in costs for it. Can the company claim ₹15,000 as a deduction? What can the Assessing Officer do?

Show the solution

Identify the issue: expenditure in relation to income that does not form part of total income.
Apply section 14(1): no deduction is allowed for such expenditure, irrespective of anything to the contrary in the Act.
Apply section 14(3): the bar also applies where the expenditure is incurred in a tax year but the exempt income has not accrued, arisen or been received in that year. So the nil receipt this year does not help.
Apply section 14(2)(b): if the AO is not satisfied with the claim that no expenditure was incurred, he determines the amount by the prescribed method, having regard to the accounts.

Answer: The company cannot claim the ₹15,000 as a deduction. Section 14(1) bars it, and section 14(3) applies even though no exempt income was received this year. The AO may also determine the expenditure by the prescribed method if he rejects the nil-expense claim.

Exam tips

Start every answer with section 14(1) in one sentence, then apply it to the facts, then conclude.
Cite section 14(3) whenever the question says exempt income was not received this year.
If apportionment is asked and no basis is given, say the AO uses the prescribed method under section 14(2). Do not make up a rate.
In numerical questions, show both steps clearly: add back the expense and deduct the exempt income.
Use the Income-tax Act, 2025 and the term tax year, not the old law's terms.

Practice questions from Incomes which do not form part of Total Income

Expenditure Related to Exempt Income (Section 14) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Expenditure Related to Exempt Income (Section 14): frequently asked questions

What does section 14 of the Income-tax Act, 2025 say?

It bars any deduction for expenditure incurred in relation to income that does not form part of total income. It also lets the Assessing Officer determine the expenditure by a prescribed method when he is not satisfied with the claim. It applies even if the exempt income was not received in that tax year.

How is expenditure for exempt income apportioned?

Section 14(2) says the Assessing Officer determines the amount by any method as may be prescribed. This applies when he is not satisfied with the claimed expenditure or with a claim of nil expenditure. In an exam, use any basis given in the question.

Does section 14 apply if no exempt income was earned this year?

Yes. Section 14(3) says the section applies where expenditure was incurred in a tax year in relation to exempt income, even if that income has not accrued, arisen or been received in that year.

Is the exempt income itself taxed under section 14?

No. Section 14 does not tax exempt income. It only stops you from claiming a deduction for the cost of earning it.