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Disallowance Under Income Tax Act – What Expenses Are Not Allowed for Deduction in FY 2024-25 & FY 2025-26?

When filing income tax returns, most business owners and professionals focus on claiming deductions and saving tax. But did you know that certain expenses—if not compliant—can actually be disallowed under the Income Tax Act? This means they won’t be counted as business expenses and you could end up paying more tax than expected.

In this article , we’ll break down what disallowance under the Income Tax Act means, which expenses are disallowed, and how to avoid common mistakes—especially for Financial Years 2024-25 and 2025-26.

Let’s make this topic easy to understand and useful for your tax planning.

What is Disallowance Under the Income Tax Act?

Disallowance simply means that some of your expenses won’t be accepted by the Income Tax Department when calculating your taxable income. These could be because of:

• Missing documents
• Violations of tax rules
• Payments in cash beyond limits
• Expenses that are personal in nature

When an expense is disallowed, your profit increases for tax purposes, and so does your tax liability.

Why Are Certain Expenses Disallowed?

The Income Tax Act is designed to allow only genuine business expenses that are properly recorded and legally paid. If you try to claim deductions on personal expenses, excessive payments, or non-compliant transactions, the tax department has the authority to disallow them during scrutiny or assessment.

Top Disallowed Expenses You Should Know (FY 2024-25 & 2025-26)

Here’s a list of commonly disallowed expenses under different sections of the Income Tax Act:

1. Cash Payments Exceeding ₹10,000 (Section 40A(3))

If you pay more than ₹10,000 in cash (per person, per day) for any expense, it will be disallowed.

Exception: Transporters are allowed up to ₹35,000 in cash per day.

2. Payment Without Deducting TDS (Section 40(a)(ia))

If you make payments (like professional fees, rent, contractor payments) without deducting TDS or fail to deposit it on time, 30% of that expense will be disallowed.

3. Excessive or Unreasonable Payments to Related Persons (Section 40A(2))

If you pay relatives or related parties more than fair market value for goods or services, the excess portion will be disallowed.

4. Interest and Salary to Partners Not as per Deed (Section 40(b))

In a partnership firm:

• Salary and interest paid to partners must be as per partnership deed
• Interest >12% p.a. or salary above limits will be disallowed

5. EPF, ESI & Other Employee Contributions Not Deposited on Time

Even if you deduct employees’ EPF, ESI, etc., if you don’t deposit them within the due date under the respective laws, the expense will be disallowed under Section 36(1)(va).

6. Clubbing of Personal Expenses

Personal expenses claimed as business expenses (like personal travel, meals, clothing) are disallowed.

7. Provisions Made Without Actual Payment (Section 43B)

Certain expenses like:

• GST
• Bonus
• Interest on loans
• Leave encashment

are allowed only when actually paid (even if provisioned in books).

8. Unexplained Expenses (Section 69C)

If you can't explain the nature and source of an expense, or if it’s not supported by evidence (bills, receipts), the amount can be disallowed and taxed as unexplained income.

9. Payments for Non-Business Purposes

Any payment made that is not related to your core business activity is not allowed as a deduction.

Impact of Disallowance on Your Taxes

When expenses are disallowed:

• Your net profit increases
• So does your tax liability
• You may even face penalties and interest

Proper documentation and compliance help you avoid disallowance and save tax legally.

How to Avoid Expense Disallowances

• Always pay via bank (avoid cash over ₹10,000)
• Deduct and deposit TDS on time
• Maintain bills and receipts
• Pay EPF, ESI, GST, and other statutory dues before deadlines
• Clearly separate business and personal expenses
• Avoid inflated payments to relatives
• Ensure partnership deed allows for salary/interest to partners

FAQs on Disallowance Under Income Tax Act

What is disallowed expense under income tax?

It is any expense that the Income Tax Department doesn’t allow as a deduction while computing taxable income.

Can I claim cash expenses in my tax return?

Yes, but if you pay over ₹10,000 in cash in one day to a single person, that amount will be disallowed.

Is GST payment an allowable expense?

Yes, but it must be actually paid to the government before the due date for it to be allowed under Section 43B.

What happens if TDS is not deducted?

30% of the expense will be disallowed under Section 40(a)(ia), and you may also be penalized.

Can personal expenses be claimed in business returns?

No. Any expense not related to business is disallowed.

What is the limit for cash payments to transporters?

You can pay up to ₹35,000 in cash to transporters per day, otherwise, the expense is disallowed.

Final Thoughts

Understanding what qualifies as a disallowed expense under the Income Tax Act is crucial if you want to stay tax compliant and avoid penalties. For FY 2024-25 and FY 2025-26, the focus is on cashless compliance, timely payments, and accurate record-keeping.

Make sure your expense claims are clean, justified, and backed by documents. If you follow the rules, you’ll not only save taxes but also prevent unnecessary headaches during assessment.