## Inadmissible Deductions — Section 40
Section 40 lists payments that are disallowed even if otherwise allowable under Sections 30–37, mostly to enforce TDS compliance.
### A. Disallowance for non-compliance with TDS — 40(a)(i) / 40(a)(ia)
Trigger: TDS was deductible but not deducted in the relevant PY (RPY), OR was deducted but not remitted by the due date u/s 139(1).
| Payee | Section | Extent disallowed |
|---|---|---|
| Non-resident (non-corporate or foreign company) | 40(a)(i) | 100% of the payment |
| Any resident payee | 40(a)(ia) | 30% of the payment |
- For non-residents, 40(a)(i) covers interest, royalty, FTS, or other sums chargeable to tax.
- Payments made outside India are always 100% disallowed.
- RPY = the previous year in which the expenditure is incurred.
Subsequent allowance: The disallowed amount is allowed later —
- If TDS was deducted but not remitted in RPY → allowed in the year of actual remittance.
- If TDS was not deducted in RPY → allowed in the year of actual deduction and remittance.
- In both cases the 139(1) due date is irrelevant for the later allowance.
Assumed compliance: The payer is not treated as assessee-in-default u/s 201(1) if the payee (i) files a return u/s 139, (ii) includes the receipt in income, and (iii) pays tax on it — and the payer obtains an accountant's certificate. TDS is then deemed deducted/remitted in the year the payee files the return (deduction allowed in subsequent PYs). Interest u/s 201(1A) still runs up to the deemed date of deduction.
### B. Taxes on income — 40(a)(ii)
Any tax on profits/gains of business or profession, including surcharge and cess, is disallowed (e.g., income tax, surcharge, education cess).
### C. Salaries paid outside India / to non-residents — 40(a)(iii)
Disallowed if TDS is not deducted, or deducted but not deposited per Chapter XVII-B.
### D. Contributions to employee welfare funds — 40(a)(iv)
Contribution to PF or other funds is disallowed if the assessee has not made effective arrangements to deduct TDS on taxable 'Salaries' payments made out of the fund.
### E. Tax on non-monetary perquisites — 40(a)(v)
Tax paid by the employer on non-monetary perquisites on behalf of employees is disallowed. Correspondingly, the benefit is exempt in the employee's hands u/s 10(10CC).