Disallowance u/s 14A Rule 8D

Let us see an illustration on Rule 8D computation

Mr. A has taken a loan of Rs.15 lakh on 5 January 2018 @ 10% during the FY 2017-18. Therefore, his interest expenditure for the year on this loan is Rs.1,50,000. This loan was utilized for making an investment of Rs.15 lakh in various avenues; income from this is exempted from tax.

Monthly closing balances of this investment is Rs 10,00,000 (January 2018), Rs 12,50,000 (February 2018), Rs 15,00,000 (March 2018).

Rule 8D Disallowance

Amount (in Rs)
Any amount of expenditure which is directly relating to exempt income .............=1,50,000

Amount equal to 1% of annual average of monthly average of opening and closing balances of value of investment whose income is or shall be exempt – 1% of Rs 10,00,000 (See computation below)


Monthly average of Investment 2

January 2018 – Rs 0 + Rs 10,00,000/2 = Rs 5,00,000
February 2018 – Rs 10,00,000 + Rs 12,50,000/2 = Rs 11,25,000
March 2018 – Rs 12,50,000 + Rs 15,00,000/2 = Rs 13,75,000

Annual Average of the above monthly averages = Rs 5,00,000 + Rs 11,25,000 + Rs 13,75,000 / 3  (Loan was borrowed only in January 2018)
= Rs 10,00,000.................................= 10000/-

Total disallowance under Section 14A read with Rule 8D = 160000