Form 3CD Clause 30B for AY 2026-27: Section 94B, 30% EBITDA & Thin Capitalisation

Direct answer: For FY 2025-26 / AY 2026-27, Form 3CD Clause 30B requires tax-audit reporting where Section 94B limits the deduction of interest or similar finance cost on qualifying cross-border debt. Broadly, Section 94B applies when an Indian company or a permanent establishment of a foreign company incurs deductible interest or similar expenditure exceeding ₹1 crore on debt from a non-resident associated enterprise. The deductible amount is restricted by the statutory 30% EBITDA rule, subject to the section’s conditions, exclusions and carry-forward mechanism.

Update — 28 September 2026: CBDT changed the specified ordinary AY 2026–27 tax-audit report deadline from 30 September to 21 October 2026 and the related audited return deadline from 31 October to 21 November 2026. Section 92E / Form 3CEB cases follow a separate timetable. Official Income Tax Department announcement.

Why Clause 30B matters in AY 2026-27

Clause 30B sits at the intersection of tax audit, transfer pricing and financing structure. A company can have a perfectly documented arm’s-length interest rate under transfer-pricing rules and still face a separate deduction restriction under Section 94B. The two tests answer different questions: transfer pricing asks whether the price of the related-party financing is arm’s length; Section 94B asks how much qualifying interest is deductible in the current year.

For FY 2025-26 / AY 2026-27, the Income-tax Act, 1961 continues to govern the tax audit and Forms 3CA/3CB with Form 3CD remain applicable. The ordinary tax-audit report deadline is 21 October 2026, subject to the rules applicable to the taxpayer.

Section 94B: the core thin-capitalisation rule

Section 94B applies to an Indian company, or a permanent establishment of a foreign company in India, where deductible interest or expenditure of a similar nature exceeds ₹1 crore in respect of qualifying debt issued by a non-resident associated enterprise. A debt from an otherwise unrelated lender can also be treated as associated-enterprise debt where an associated enterprise provides an implicit or explicit guarantee or deposits a corresponding and matching amount of funds with the lender.

The provision is designed to prevent excessive erosion of the Indian tax base through related-party debt. It is distinct from the arm’s-length pricing provisions in Chapter X and must therefore be tested separately even where Form 3CEB and transfer-pricing documentation have been completed.

The 30% EBITDA limitation

Section 94B(2) defines excess interest by reference to 30% of the borrower’s earnings before interest, taxes, depreciation and amortisation (EBITDA), with the statutory comparison to interest paid or payable to associated enterprises. In practical terms, the tax team should calculate the relevant EBITDA carefully from the tax records, identify the qualifying interest pool, and preserve a transparent working showing how the disallowable amount was derived.

Worked example

Assume an Indian company pays ₹4.20 crore of qualifying interest to its foreign associated enterprise and its relevant EBITDA is ₹10 crore. Thirty per cent of EBITDA is ₹3 crore. Subject to the detailed statutory computation and facts, the current-year deduction may be restricted and the excess may need to be carried forward rather than deducted immediately. The tax-audit file should show the interest population, Section 94B applicability test, EBITDA computation, current-year allowable amount and carried-forward balance.

₹1 crore threshold: do not test it casually

The ₹1 crore threshold is a gateway condition, but it should not be reduced to a single general-ledger account. Finance teams should first map all interest and expenditure of a similar nature connected with qualifying debt. Depending on the financing terms, this review can extend beyond a line item labelled “interest” and may require examination of finance charges arising from loans, financial instruments, finance leases, derivatives or other arrangements covered by the statutory definition of debt.

Deemed associated-enterprise debt can catch third-party borrowing

A common control failure is to screen only loans directly advanced by a foreign group company. Section 94B can deem debt from an unrelated lender to be issued by an associated enterprise where the associated enterprise provides an implicit or explicit guarantee or deposits corresponding and matching funds with the lender. Treasury confirmations, guarantee registers, bank sanction letters and group financing arrangements therefore matter for Clause 30B.

Who is excluded?

Section 94B contains statutory exclusions for specified businesses and entities. The current law excludes banking and insurance businesses and also contains relief for specified IFSC finance companies and notified classes of non-banking financial companies. Do not assume that every finance-sector entity is outside Section 94B: the precise statutory or notified category must be checked and documented.

Eight-year carry-forward: build a continuity schedule

Interest restricted under Section 94B is not necessarily lost permanently. The section permits qualifying unallowed interest to be carried forward for up to eight assessment years, subject to the maximum deduction permitted in the later year. This makes a year-on-year continuity schedule essential. A good schedule should show opening carried-forward interest by originating assessment year, current-year Section 94B restriction, utilisation in the current year, expiry risk and closing balance.

Clause 30B and transfer pricing: reconcile, do not merge

The Clause 30B working should be reconciled with, but not substituted by, the transfer-pricing file. The Form 3CEB transaction value, Rule 10D documentation, loan agreements, arm’s-length benchmarking, withholding tax records and Section 94B computation should be capable of being traced to the same underlying financing transactions. Differences in populations should be explained rather than silently forced to match.

Related PGT guides: https://www.pgtandassociates.com/post/transfer-pricing-documentation-rule-10d and https://www.pgtandassociates.com/post/form-3cd-clause-30a-secondary-adjustment and https://www.pgtandassociates.com/post/secondary-adjustment-transfer-pricing

Eight-step Clause 30B reconciliation checklist

1. Extract all interest and similar finance-cost accounts from the general ledger. 2. Map each borrowing to the legal lender and ultimate associated-enterprise relationship. 3. Review explicit and implicit guarantees and matching-deposit arrangements. 4. Test whether the ₹1 crore statutory threshold is crossed. 5. Compute the relevant EBITDA and preserve the reconciliation. 6. Calculate the current-year Section 94B limitation and the carried-forward amount. 7. Reconcile the financing population to Form 3CEB, withholding-tax records and transfer-pricing documentation. 8. Roll forward prior-year Section 94B balances and identify amounts approaching the eight-year expiry.

Common errors professionals should avoid

Treating Section 94B as merely a transfer-pricing adjustment is incorrect. So is testing only direct foreign-group loans while ignoring guaranteed third-party borrowing. Other frequent issues include inconsistent EBITDA workings across years, failure to preserve the age-wise carry-forward schedule, overlooking finance charges of a similar nature, and allowing the Form 3CD disclosure to diverge from Form 3CEB or the tax computation without explanation.

FAQs

Does Section 94B apply simply because there is a foreign loan?

No. The borrower, lender relationship, nature of debt, amount of qualifying interest, associated-enterprise connection and statutory exclusions all need to be tested.

Is an arm’s-length interest rate enough to avoid Section 94B?

No. Arm’s-length pricing and the Section 94B deduction limitation are separate tests. A rate may be arm’s length but the current-year deduction can still be restricted under the thin-capitalisation rule.

Can disallowed interest be claimed later?

Section 94B permits eligible unallowed interest to be carried forward for up to eight assessment years, subject to the section’s later-year deduction limit.

Does a bank guarantee from the foreign parent matter?

It can. The proviso to Section 94B(1) can deem otherwise third-party debt to be associated-enterprise debt where an associated enterprise provides an implicit or explicit guarantee or matching funds.

Which tax-audit form applies for FY 2025-26?

For FY 2025-26 / AY 2026-27, the existing Income-tax Act, 1961 audit framework continues: Form 3CA or Form 3CB, as applicable, together with Form 3CD.

Primary references

Income Tax Department — Section 94B / Thin Capitalisation guidance: https://www.incometaxindia.gov.in/en/transfer-pricing

Income Tax Department — AY 2026-27 tax-audit forms and transition guidance: https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/income-tax-forms

ICAI — Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2026): https://publication.icai.org/publication/968

Practical takeaway

For groups with cross-border borrowings, Clause 30B should be treated as a treasury-and-tax reconciliation exercise, not a year-end form-filling task. The highest-value control is to connect legal financing documents, guarantees, transfer-pricing records, withholding-tax compliance, EBITDA computation and the eight-year carry-forward schedule before the tax-audit file is finalised.

Need a review?

PGT & Associates assists businesses with tax-audit reconciliations, international-tax and transfer-pricing compliance, and review of cross-border financing structures. For a focused review of Section 94B or Form 3CD reporting, visit https://www.pgtandassociates.com/contact-us.

Disclaimer: This article is for general professional information and does not constitute legal, tax or investment advice. Section 94B outcomes depend on the precise financing structure, associated-enterprise relationship, statutory exclusions and facts of each case. Obtain case-specific advice before taking a filing or restructuring position.