Clause 113 of the Finance Bill, 2026 proposes a targeted amendment to Schedule XIV of the Income-tax Act, 2025, which governs the computation of profits and gains of insurance business other than life insurance. The amendment resolves a long-standing structural inconsistency between:
- the TDS-based disallowance provisions under section 35(b), and
- the special computation mechanism prescribed in Schedule XIV for non-life insurers.
Existing Legal Position
Computation of Income of Non-Life Insurers
- Part B of Schedule XIV lays down a special method for computing taxable income of insurance businesses other than life insurance.
- Under paragraph 4(1)(a), any expenditure or allowance debited to the profit and loss account which is inadmissible under sections 28 to 54 of the Act is required to be added back to the profits.
Disallowance under Section 35(b)
- Section 35(b)(i) and (ii) provide that specified payments on which tax is deductible at source shall not be allowed as deduction if:
- tax is not deducted, or
- tax is deducted but not deposited within the due date specified under section 263(1).
- Crucially, the same provisions also state that “The amount so disallowed shall be allowed as a deduction in the tax year in which such tax is deducted and paid”.
The Practical Issue Faced by Non-Life Insurance Companies
While section 35(b) allows subsequent deduction once TDS compliance is completed, Schedule XIV did not provide a corresponding mechanism to give effect to this relief.
- Paragraph 4(2) of Schedule XIV allows subsequent deduction only for amounts disallowed under section 37 on payment basis.
- There was no similar enabling provision for amounts disallowed under section 35(b) and added back under paragraph 4(1)(a).
As a result, non-life insurers faced:
- permanent disallowance in practice, and
- tax treatment inconsistent with the legislative intent of section 35(b).
Amendments Proposed under Clause 113
Clause 113 introduces two amendments to Schedule XIV.
1. Technical Clarification
- In paragraph 4(1)(a), the words “this rule” are substituted with “this paragraph”.
- This is a clarificatory amendment to remove drafting ambiguity and ensure correct internal referencing.
2. Substantive Amendment – Insertion of Paragraph 4(3)
A new sub-paragraph (3) is proposed to be inserted in paragraph 4 of Schedule XIV, providing that:
- Any amount:
- disallowed under section 35(b)(i) or (ii), and
- added back while computing profits under paragraph 4(1)(a),
- shall be allowed as a deduction in the tax year in which:
- the tax is deducted and paid,
- in accordance with the provisions of section 35(b), as applicable.
Meaning and Impact of the Amendment
This amendment ensures that:
- Disallowance due to TDS default is temporary, not permanent.
- Non-life insurance companies receive the same statutory relief as other taxpayers.
- Schedule XIV now fully aligns with the substantive provisions of section 35(b).
Practical Implications
Before the Amendment
- TDS-default expenditure was added back.
- No explicit provision for later deduction.
- Led to disputes, conservative provisioning, and tax uncertainty.
After the Amendment
- Deduction becomes available in the year of actual TDS compliance.
- Eliminates unintended hardship.
- Improves certainty in tax computation and audit positions.
Effective Date
- Effective from: 1 April 2026
- Applicable for: Tax Year 2026-27 and subsequent tax years
Why This Amendment Is Important
- Corrects a mechanical gap in insurance taxation
- Ensures consistency between computation schedules and charging provisions
- Reduces avoidable litigation
- Supports fair and neutral tax treatment for the insurance sector
Conclusion
Clause 113 of the Finance Bill, 2026 brings a necessary and well-calibrated correction to the taxation framework for non-life insurance companies. By explicitly permitting deduction of expenditure disallowed due to TDS non-compliance once the tax is subsequently paid, the amendment restores the intended operation of section 35(b) within the special computation regime of Schedule XIV.
This change enhances legal certainty, aligns computation rules with substantive law, and reflects a pragmatic approach to insurance sector taxation.
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