Deduction for Expenditure on Exempted Income – Rule 8D

 

Applicability of the Rule:
This rule determines the amount of expenditure which will be allowed as deduction, incurred in relation to income not forming part of total income, in case the Assessing Officer is not satisfied with:

• The correctness of the claim of expenditure made by the assessee; or
• The claim made by the assessee that no expenditure has been incurred in relation to income described above.

Incomes which do not form part of total income generally includes exempted income like dividend from Indian company, mutual funds, income on transfer of capital asset being a unit of specified Unit Scheme, interest on notified securities, bonds exempt under 10(15), etc.
Determination of amount of expenditure:
The amount of expenditure shall be the aggregate of the following amounts:
(1)   The amount of expenditure directly attributable to such income;
(2)   In case, interest expenditure has been incurred, then an amount computed in accordance with the following formula,

A X B/C

                   Where A = actual amount of expenditure by way of interest.

B = the average of the value of investment, as appearing in the balance sheet, on the first day and last day of the previous year.

C = the average of the total assets as appearing in the balance sheet, on the first day and last day of the previous year.

(3)   An amount equal to one-half per cent of the average of the value of investment, as appearing in the balance sheet, on the first day and last day of the previous year.
For the purpose of above calculation, ‘total assets’ shall exclude increase on account of revaluation but shall include the decrease on account of revaluation of assets.