Rule 14: Expenditure relating to income outside total income
Rule 14 prescribes a calculation method for expenditure relating to income that does not form part of total income. It combines direct expenditure with an investment-based amount, subject to a cap equal to total expenditure claimed.
Official notified Income-tax Rules, 2026Need advice on Rule 14?
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Bare law
Rule 14 - Method for determining amount of expenditure in relation to income not includible in total income
(1) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts:— (a) the amount of expenditure directly relating to income which does not form part of total income; and (b) an amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income.
(2) The amounts referred to in sub-rule (1) shall not exceed the total expenditure claimed by the assessee.
Introduction
Read the method with section 14 of the Act. The prescribed calculation does not remove the Act’s conditions concerning the Assessing Officer’s consideration of the accounts and dissatisfaction with the expenditure or nil-expenditure claim.
Rule breakdown
Check the statutory context before computing
Section 14(1) disallows deduction for expenditure incurred in relation to income outside total income. Section 14(2) addresses the Officer’s dissatisfaction, having regard to the accounts, with the correctness of the expenditure claim or a claim that no expenditure was incurred.
The rule supplies the prescribed method within that framework. A nil-expenditure claim should be supported by the accounts and facts; the mere presence of investments does not justify omitting the statutory conditions from the explanation.
Identify the direct expenditure component
Sub-rule (1)(a) concerns expenditure directly relating to income that does not form part of total income. Identify the actual relevant expenses and retain the basis for linking them to that income.
Keep the direct-expenditure schedule distinct from the investment-value schedule. The formula adds the two components; it does not replace direct expenditure with a single percentage calculation.
Build the monthly-average component
For the relevant investment value, calculate each month’s average of opening and closing balances. Take the annual average of those monthly averages and apply 1%. The investment description is tied to income which does not or shall not form part of total income.
A single closing balance for the tax year is not the prescribed annual average of monthly averages. Retain a month-by-month reconciliation to the investment ledger.
Illustrative calculation and the cap
Hypothetical: directly related expenditure is ₹20,000 and the correctly computed annual average of monthly investment averages is ₹10 lakh. The 1% component is ₹10,000, giving an aggregate of ₹30,000. If total expenditure claimed is ₹25,000, sub-rule (2) caps the prescribed amount at ₹25,000.
The example assumes the method is applicable under section 14 and the relevant investment and expense amounts are established. It illustrates the calculation and cap, not a conclusion for every portfolio.
No receipt during the year: check section 14(3)
Section 14(3) expressly addresses expenditure incurred in relation to the relevant income even where that income has not accrued, arisen or been received during the tax year. Therefore absence of a receipt alone should not be presented as an automatic exclusion.
Prepare the statutory applicability analysis, direct expense schedule, monthly investment schedule and total-expenditure cap together so that each stage can be reviewed.
Key takeaways
Two components
Add directly related expenditure and 1% of the specified annual average of monthly investment averages.
Monthly data matters
Use each month’s opening and closing investment balances rather than only a year-end balance.
Overall cap
The aggregate amounts under sub-rule (1) cannot exceed total expenditure claimed by the assessee.
Practical checklist
- Document the section 14 conditions and account-based analysis.
- Retain monthly opening and closing investment balances.
- Reconcile the direct component and apply the total-expenditure cap.
Avoid
- Do not use only the year-end investment balance.
- Do not omit directly related expenditure from the aggregate.
- Do not assume no receipt automatically removes section 14.
FAQs
Is the method simply 1% of year-end investments?
No. It uses 1% of the annual average of the monthly averages of opening and closing balances of the relevant investment value, plus directly related expenditure.
Can the prescribed aggregate exceed all expenditure claimed?
No. Sub-rule (2) caps the amounts under sub-rule (1) at total expenditure claimed by the assessee.
Does no exempt-income receipt automatically end the analysis?
No. Section 14(3) expressly covers its stated expenditure situation even where the income has not accrued, arisen or been received during that tax year.
Glossary
- Monthly average
- For the relevant investment value, the average of the opening and closing balances for a month.
- Total-expenditure cap
- The limit in sub-rule (2) that the aggregate prescribed amounts cannot exceed total expenditure claimed.