The ceiling is not a deemed expenditure allowance
Section 60 of the Income-tax Act, 2025 limits the stated non-resident head-office expenditure attributable to Indian business or profession. Eligible expenditure and the ceiling are separate inputs: five per cent of the relevant income base does not establish that this much was incurred or attributable. Checked on 28 October 2026, this guide concerns tax year 2026–27. It does not mechanically change references in a FY 2025–26 / AY 2026–27 return or determine treaty relief. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, section 60.
Identify the overseas executive and administration pool
The definition covers executive and general administration expenditure incurred outside India, including the specified premises, personnel and travel costs. Obtain underlying invoices, payroll, duties and cost-centre records. Distinguish this pool from unrelated foreign operations, unsupported internal charges and costs governed by another special computation. A group allocation invoice is evidence of a claim, not proof of all legal conditions. Review any treaty interaction and other applicable restrictions separately. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, section 60.
Reconstruct adjusted total income from its statutory definition
Section 60(3)(a) excludes the effect of this allowance, section 33(11), section 32(i)(A), the listed carried-forward losses under sections 111(1), 112(1), 113(2) and 115(2), and Chapter VIII deductions. Use a line-by-line reconciliation to the actual computation. Book profit, turnover and income after every deduction are not interchangeable with this defined base. The examples stipulate correctly reconstructed bases rather than inventing a universal add-back schedule for every taxpayer. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, section 60.
Choose the correct ceiling branch
For a loss in adjusted total income, subsection (2)(a) uses five per cent of average adjusted total income. Otherwise subsection (2)(b) uses five per cent of current adjusted total income. The average uses the immediately preceding three tax years, or the stated two-year or one-year assessability alternatives. Establish which years satisfy those conditions; a missing return file does not by itself mean a year was not assessable. Do not insert zero for an inapplicable year merely to force a three-year divisor. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, section 60.
Keep attribution and the monetary limit visible
Record the total supported foreign pool, the legally supported India-attributable component, the relevant income base, the five-per-cent ceiling and the final permitted amount. Do not use a profit-based allocation solely because it produces the desired cap. Preserve the actual services, reasonable allocation evidence and no-duplication check. All model costs are assumed otherwise allowable; their arithmetic does not override another prohibition or establish a treaty position. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, section 60.
Reconcile the final adjustment once
Where books already deducted the whole attributable amount, add back only the excess over the permitted deduction. If the computation has not yet deducted the amount, claim the supported permitted amount rather than also reversing a nonexistent debit. Check that the same centrally incurred cost has not been claimed in direct Indian expenses. Maintain the legal classification, income-base reconstruction, historical assessability and allowed/excess reconciliation together. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, section 60.
Applicable primary references
Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, section 60
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Current base and cost above ceiling
Assume correctly reconstructed adjusted total income ₹400 lakh and otherwise allowable attributable head-office cost ₹30 lakh. Ceiling is ₹20 lakh; permitted deduction ₹20 lakh and excess ₹10 lakh.
Illustrative example 2: Actual attributable cost below ceiling
Assume adjusted total income ₹300 lakh and otherwise allowable attributable cost ₹9 lakh. Ceiling ₹15 lakh does not create another ₹6 lakh deduction. The permitted amount is ₹9 lakh.
Illustrative example 3: Loss-year three-year average
Assume current adjusted total income is a loss, and the assessee was assessable in each preceding relevant year, with adjusted total incomes ₹100, ₹200 and ₹300 lakh. Average ₹200 lakh gives a ₹10 lakh ceiling. Attributable cost ₹18 lakh leaves ₹8 lakh excess.
Illustrative example 4: Two assessable years
Assume the statutory two-year alternative applies, with relevant adjusted total incomes ₹120 and ₹180 lakh, and current adjusted total income is a loss. Average ₹150 lakh gives a ₹7.50 lakh ceiling. Cost ₹9 lakh leaves ₹1.50 lakh excess; dividing by three would wrongly give a ₹5 lakh ceiling.
Illustrative example 5: One assessable year
Assume the one-year alternative applies, relevant adjusted total income ₹80 lakh, current adjusted total income is a loss and eligible attributable cost ₹6 lakh. Ceiling ₹4 lakh leaves ₹2 lakh excess.
Illustrative example 6: Attribution before the cap
Assume overseas pool ₹50 lakh, legally supported India-attributable component ₹12 lakh and current adjusted total income ₹500 lakh. Ceiling ₹25 lakh does not permit the whole ₹50 lakh pool. Permitted deduction is ₹12 lakh; ₹38 lakh was never established as attributable in this model.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm non-resident scope | Status, Indian activity and any special regime |
| 2 | Identify overseas administration costs | Underlying premises, personnel and travel records |
| 3 | Remove unrelated or separately governed items | Supported legal classification |
| 4 | Establish India attribution | Actual benefit and defensible allocation evidence |
| 5 | Reconstruct adjusted total income | Statutory exclusions reconciled to computation |
| 6 | Select current or loss-year branch | Sign of correctly reconstructed adjusted total income |
| 7 | Verify historical assessability | Three/two/one-year conditions and evidence |
| 8 | Calculate the relevant ceiling | Five per cent of the correct base |
| 9 | Apply cost and cap without duplication | Permitted deduction, excess and existing book treatment |
| 10 | Retain a reviewable closing schedule | Treaty review, source records and complete computation bridge |
Sixteen practitioner FAQs
1. Is five per cent a deemed head-office expense?
No. Actual qualifying attributable expenditure must first be established.
2. Does this guide concern a resident Indian company automatically?
No. Section 60's stated taxpayer scope is non-resident.
3. Does an allocation invoice alone prove deductibility?
No. Support the underlying costs, purpose and India attribution.
4. Is total global administration expenditure the deductible amount?
No. Identify the component attributable to the Indian business and apply the relevant limit.
5. Is adjusted total income the same as turnover?
No. It is the specifically defined income base.
6. Can book profit be substituted for that base?
No. Reconcile the actual statutory computation.
7. Must the allowance itself be ignored in computing the base?
Yes. Follow the definition rather than allowing a circular deduction calculation.
8. When is the historical average relevant?
When correctly reconstructed current adjusted total income is a loss, under the stated branch.
9. Is the historical divisor always three?
No. The statutory two-year and one-year alternatives depend on assessability.
10. Does a missing document prove non-assessability?
No. Establish the actual legal status of the year independently.
11. Can unused ceiling create a further expense claim?
No. A ceiling above supported cost does not establish additional expenditure.
12. Are all foreign office charges within this section?
Review the definition, actual expense and other applicable special provisions.
13. Do these examples decide treaty priority?
No. Treaty interaction requires a separate supported conclusion.
14. Should an amount already excluded be added back again?
No. Reconcile to the actual starting computation.
15. Can the same central cost be claimed locally and centrally?
No. Trace the cost population and remove duplicate claims.
16. Which period is addressed?
Tax year 2026–27 under the Income-tax Act, 2025, distinct from earlier-period returns.
Conclusion
Establish attributable overseas administration costs, reconstruct adjusted total income and apply the correct current-income or loss-year ceiling.