Start with chargeability, then test the company's deduction
For FY 2025–26 and AY 2026–27, apply the Income-tax Act, 1961. Section 40(a)(iii) denies a business deduction for a payment chargeable as salary if it is payable outside India or to a non-resident and the applicable tax has neither been paid on it nor deducted from it under Chapter XVII-B. The conditions must be tested on the payment. It is the affected expense that goes into the business-income bridge, not simply the amount of missing withholding.
Read the applicable text: Income Tax Department: Income-tax Act, 1961, section 40 Income Tax Department: section 9 Income Tax Department: section 192 CBDT Notification 49/2026: notified ITR-6 CBDT ITR-6 validation rules, Annexure 1 Department ITR utilities and schema Finance Act, 2026: section 139 amendment CBDT Circular 7/2026: filing extension.
Separate the employment facts from the bank instruction
Identify the legal employer, services, period, where the amount is payable and the recipient's residence under the applicable law. Section 9(1)(ii) addresses salary earned in India and treats salary for services rendered in India as earned here, including specified connected leave or rest periods. Analyse chargeability under the Act and applicable treaty facts; a foreign bank transfer, foreign passport or currency code does not answer that question. An intercompany recharge needs separate characterisation before it is treated as salary in this working.
Tie the gross expense to the section 192 trail
Section 192 ordinarily applies when salary is paid, using the applicable average rate computed on estimated salary income for the financial year. Do not calculate a flat withholding rate for all expatriate salary. For salary payable in foreign currency, apply the prescribed exchange-rate rule under section 192(6). Reconcile each pay run to withholding, actual remittance and corrected returns where relevant. Show foreign payroll tax separately from evidence relied on for the Indian statutory condition. Test zero withholding supported by a chargeability or tax computation separately from a missing deduction. Analyse any late or partial remittance on its own facts; section 40(a)(iii) does not contain the same express timing and later allowance wording as section 40(a)(i).
Map the expense once
For a company subject to tax audit, the ITR-6 validation annexure links Form 3CD clause 21(b)(iii)(A) and (B) to Part A-OI 8A(d). The notified form aggregates the item into 8A(j), feeding Schedule BP item 16. Use the audited figures and reconcile the utility output to the ledger and a separate legal computation. The annexure uses the payment amount for the non-deduction branch and a proportion of payment based on deducted tax not deposited for the deposit branch. That comparison checks reporting consistency; it does not replace the statutory analysis. Do not copy the amount into a residual add-back or into a non-salary withholding field.
Keep the applicable filing calendar with the working
As at 6 November 2026, the department's download page lists the AY 2026–27 ITR-6 offline utility version 1.0.2 released on 4 November 2026, with its schema and validations linked separately. Circular 7/2026 moved the statutory 31 October 2026 return date to 21 November 2026 for serial number 2 of Explanation 2 to section 139(1), and the specified audit-report date for that class from 30 September to 21 October 2026. Companies to which section 92E applies are in serial number 1, with a statutory return date of 30 November 2026; the circular does not extend that class. A filing extension does not itself change the section 192 withholding trigger.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: No Indian tax deducted on the covered salary
A company debits ₹12 lakh of India-chargeable salary payable abroad. Assume applicable Indian tax was neither paid nor deducted. The section 40(a)(iii) add-back is ₹12 lakh. With book profit of ₹40 lakh and no other adjustments, business income is ₹52 lakh.
Illustrative example 2: A payment in India to a non-resident
₹8 lakh salary is payable in India to a non-resident for India services, chargeable in India. Assume the applicable tax was neither paid nor deducted. Add back ₹8 lakh, even though the bank transfer is domestic.
Illustrative example 3: Separate two overseas pay runs
The ledger contains ₹9 lakh of covered salary with the applicable Indian tax properly deducted and deposited and ₹4 lakh for which neither occurred. Assuming all other conditions for deduction are met, ₹9 lakh is unaffected and the add-back is ₹4 lakh.
Illustrative example 4: Remove a non-chargeable component from this test
Of ₹10 lakh paid abroad, assume a documented legal analysis finds ₹7 lakh outside Indian salary chargeability and ₹3 lakh chargeable, with applicable Indian tax neither paid nor deducted on the latter. The section 40(a)(iii) add-back is ₹3 lakh on those facts.
Illustrative example 5: Reconcile gross pay and tax withheld
Covered gross salary is ₹18 lakh. Assume ₹3 lakh is the applicable withholding from the separate annual salary computation and that it was withheld and deposited. Cash to the employee is ₹15 lakh, but the gross salary debit remains ₹18 lakh and the section 40(a)(iii) adjustment on these facts is nil.
Illustrative example 6: Run the audit comparison independently
Assume a Form 3CD clause 21(b)(iii)(A) payment of ₹4 lakh and a separate clause 21(b)(iii)(B) payment of ₹10 lakh with ₹2 lakh tax deducted and ₹1.5 lakh deposited for the relevant comparison. The tax shortfall is ₹0.5 lakh, or 25% of the ₹2 lakh deducted. Applying that fraction to the ₹10 lakh payment yields ₹2.5 lakh for B and ₹6.5 lakh including A. This is an audit-data comparison, not a freestanding legal formula for every partial deposit. Resolve any difference between the audit comparison and the legally supportable adjustment before filing.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the assessment period | FY 2025–26 ledger and AY 2026–27 working |
| 2 | Map the parties and employment | Appointment, deputation and recharge agreements |
| 3 | Determine residence for the relevant year | Tax residence working |
| 4 | Identify where salary is payable | Payroll terms and payment evidence |
| 5 | Document chargeability and treaty position | Service days, treaty and computation file |
| 6 | Reconcile withholding to the gross pay run | Employee and payment-level register |
| 7 | Trace deposits and evidence | Challans and allocation records |
| 8 | Check Form 3CD reporting if applicable | Clause 21(b)(iii) reconciliation |
| 9 | Check Part A-OI and Schedule BP | 8A(d), 8A(j) and BP item 16 bridge |
| 10 | Confirm version and filing class | Current validation, due-date evidence and sign-off |
Sixteen practitioner FAQs
1. Does a foreign payroll entry automatically trigger disallowance?
No. Test salary chargeability, place of payment or non-residence, and the applicable Indian tax condition.
2. Can a salary paid in rupees be covered?
Yes. Payment currency is not one of the statutory tests.
3. Is place of service the same as place where salary is payable?
No. One helps determine salary source, and the other is an independent fact for section 40(a)(iii).
4. What about an India payment to a resident?
That fact pattern falls outside this sub-clause if not payable abroad. Check withholding compliance separately.
5. Does a foreign tax slip settle the Indian issue?
No. Review the applicable Indian tax and treaty position and retain the evidence.
6. Does a treaty claim automatically remove withholding?
Document the actual treaty provision and facts before drawing any conclusion.
7. Do split payrolls create two deductions for the same cost?
No. Match the employee, period, ledger entries and intercompany accounts to avoid double-counting.
8. Can the charge be moved to section 40(a)(i) because the payee is foreign?
Characterise the payment first. The statute excludes salary from that non-salary branch.
9. Can the 30% resident payment formula simply be applied?
No. The specific salary sub-clause does not prescribe the section 40(a)(ia) rate.
10. Does the withholding amount equal the add-back?
No. Reconcile the affected salary expense separately from the employee's tax.
11. Which Form 3CD clause is mapped to the salary row?
CBDT's AY 2026–27 ITR-6 annexure identifies clause 21(b)(iii), with distinct branches for non-deduction and deposit differences.
12. What if the statutory computation and audit comparison differ?
Trace timing, amounts and legal reasons at employee level and resolve the difference with the audit and filing teams.
13. Does absence of section 44AB audit remove the statutory test?
No. The company's business-income computation still needs the correct legal treatment.
14. Does a later deposit automatically reverse the add-back?
Do not infer an automatic later deduction from the general preceding-year ITR field. Establish a legal basis and retain evidence.
15. Is 21 November 2026 a universal company filing date?
No. Circular 7/2026 applies to the specified serial number 2 population; verify whether section 92E applies.
16. Can I enter the amount as both payroll disallowance and another Schedule BP addition?
No. Trace Part A-OI through Schedule BP and count the expense adjustment once.
Official sources
Income Tax Department: Income-tax Act, 1961, section 40 Income Tax Department: section 9 Income Tax Department: section 192 CBDT Notification 49/2026: notified ITR-6 CBDT ITR-6 validation rules, Annexure 1 Department ITR utilities and schema Finance Act, 2026: section 139 amendment CBDT Circular 7/2026: filing extension