Method of calculation under Rule 8D regarding computation of exempt expenditure against exempt Income changed vide Notification dated and effective from 02-06-2016. As per Old Rule 8D, the disallowance of exempt expenditure was required to be made for i) Directly relatable expenditure + ii) Interest x [Avg Investments yelding exempt Income/ Avg Total Assets] + ½% of Avg. Investments yielding exempt Income
However as per New Rule 8D, the disallowance of exempt expenditure is required to be made for i) Directly relatable expenditure + 1% of Avg. Investments yielding exempt Income [Here Avg Investments = Annual Avg of Monthly Avgs of Opg, and Clg. Balances]
Also disallowance shall not exceed the total expenditure claimed by the assessee.
Changes Made
a) Hence no, disallowance now required for not directly relatable interest.
b) Further the rate of ½% on Avg Investments increased to 1%.
c) Method of Calculating Average Investment changed
d) Disallowance not to exceed the total expenditure claimed by the assessee.
The above change is in consonance with Para 167 in the Budget Speech of FM which said that:
“Another issue which has led to considerable number of disputes is quantification of disallowance of expenditure relatable to exempt income in terms of Section 14A of the Income Tax Act. I propose to rationalize the formula in Rule 8D governing such quantification. The said Rule is being amended to provide that disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed