Head Office Expenditure of Non-Residents: 5% Cap Under Income Tax Act 2025 (Section 60)

Under section 60 of the Income-tax Act, 2025, a non-resident running a business or profession in India can deduct the part of its head office expenditure that is attributable to the Indian business. The deduction is capped at 5% of the adjusted total income. If the adjusted total income is a loss, the cap is 5% of the average adjusted total income of the previous three tax years instead.

This matters mainly to foreign companies with an Indian branch or project office, and to other non-residents whose overseas head office charges them for management and administration. The figures below come from the Act as amended by the Finance Act, 2026 (tax year 2026-27 onwards). This post is information, not tax advice.

What does section 60 allow?

Section 60(1) allows a non-resident assessee a deduction for head office expenditure incurred by it that is attributable to its business or profession in India. It applies "irrespective of anything to the contrary" in sections 26 to 54, which are the general rules for computing business income. So expenditure incurred outside India on head office administration, which those sections might not otherwise allow, can be claimed here, subject to the cap in section 60(2).

The deduction is computed under the head "Profits and gains of business or profession".

What counts as head office expenditure?

Section 60(3)(c) defines it as executive and general administration expenditure incurred outside India. It includes expenditure on:

• rent, rates, taxes, repairs or insurance of premises outside India used for the business or profession;
• salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, paid or allowed to any employee or other person employed in, or managing the affairs of, an office outside India;
• travelling by any such employee or other person; and
• other executive and general administration matters that may be prescribed.

Only the portion attributable to the Indian business qualifies. The Act does not give an allocation formula in section 60, so the basis of attribution should be documented.

What is the 5% limit and how does it work?

Situation	Upper limit (section 60(2))
Adjusted total income is positive (not a loss)	5% of the adjusted total income of the tax year
Adjusted total income is a loss	5% of the average adjusted total income

What is "adjusted total income"?

Section 60(3)(a) defines it as the total income computed under the Act, without giving effect to:

• the head office allowance under section 60 itself;
• the allowance under section 33(11) (depreciation not allowed for want of profits, carried forward to later years);
• the deduction referred to in section 32(i)(A);
• any loss carried forward under section 111(1), 112(1), 113(2) or 115(2); and
• the deductions under Chapter VIII.

In practice you add these items back to the total income to get the base on which 5% is applied.

How is the average computed for a loss year?

Section 60(3)(b) looks at the three tax years immediately before the relevant tax year:

Assessable in	Average adjusted total income
All three earlier years	Arithmetic mean of the three years
Only two of the three	Arithmetic mean of those two years
Only one of the three	Adjusted total income of that one year

The text of section 60 does not say what happens if the assessee was assessable in none of the three years. Do not assume a figure; take a view on the facts.

Worked example 1: profit year, expenditure above the cap

Assumptions: tax year 2026-27, a foreign company with an Indian branch. Total income computed after all deductions is Rs 42,00,000. Items to add back are shown below.

Step	Amount (Rs)
Total income as computed (after the items below)	42,00,000
Add: head office allowance under section 60 claimed in the computation	2,50,000
Add: section 33(11) allowance	2,00,000
Add: brought-forward business loss set off under section 112(1)	5,00,000
Add: Chapter VIII deductions	4,00,000
Adjusted total income	55,50,000
Limit at 5%	2,77,500

If the head office expenditure attributable to India is Rs 2,50,000, it is within the limit and is fully allowed. Had the attributable expenditure been Rs 4,00,000 against the same Rs 55,50,000 base, the deduction would be limited to Rs 2,77,500 (the base is the same because the section 60 allowance is added back whatever its size, so a larger claim lowers total income but not adjusted total income). The excess Rs 1,22,500 is not allowed under section 60, and section 60 has no carry-forward clause.

Worked example 2: loss year

Assumptions: tax year 2026-27. The branch has an adjusted total income of a loss of Rs 10,00,000. Its adjusted total income for the three earlier tax years was Rs 60,00,000, Rs 90,00,000 and Rs 1,20,00,000.

1. Average adjusted total income = (60,00,000 + 90,00,000 + 1,20,00,000) / 3 = Rs 90,00,000.
2. Limit = 5% of Rs 90,00,000 = Rs 4,50,000.
3. If attributable head office expenditure is Rs 5,00,000, the deduction is Rs 4,50,000.
4. If it is Rs 3,00,000, the whole Rs 3,00,000 is allowed.

If this branch had been assessable in only one of the three years, with an adjusted total income of Rs 40,00,000 in that year, the limit would be 5% of Rs 40,00,000 = Rs 2,00,000.

Real-life example 1: a young branch and the averaging rule

Harbour Tools Pte Ltd, a Singapore company, opened an Indian branch two years ago. The branch was assessable in only two of the last three tax years. The cap for this year uses the mean of those two years if the current year is a loss. If the current year is profitable, the cap is simply 5% of this year's adjusted total income. The history only matters when the current year is a loss.

Real-life example 2: a project office with head office salaries

A foreign contractor runs a project office in India. Its overseas head office pays the salary of a finance manager who oversees the Indian project from abroad, and rents the office she works from. Both are executive and general administration costs incurred outside India, and both fall within section 60(3)(c)(i) and (ii). The contractor claims the portion attributable to the Indian project, and stays within 5% of adjusted total income.

Common mistakes

• Applying 5% to total income instead of adjusted total income. The add-backs listed above raise the base.
• Claiming the full head office bill without an attribution to the Indian business.
• Using this year's loss as the base in a loss year. Section 60(2)(a) uses the average of earlier years.
• Forgetting that only the tax years immediately preceding the relevant year count, and only those in which the assessee was assessable.
• Assuming the excess over 5% carries forward. Section 60 does not provide for that.

Quick reference

Item	Rule	Provision
Who	Non-resident assessee	Section 60(1)
What	Head office executive and general administration expenditure outside India	Section 60(3)(c)
Profit year cap	5% of adjusted total income	Section 60(2)(b)
Loss year cap	5% of average adjusted total income	Section 60(2)(a)
Averaging window	Up to three preceding tax years	Section 60(3)(b)

Keeping the numbers ready

For a CA handling non-resident clients, the difficult part is collecting three years of adjusted total income and the add-back items for each. Finexo's practice management software helps you track client documents and recurring work. It does not compute the cap for you.

Where this is in the Act

• Section 60(1): the deduction; section 60(2): the 5% limit; section 60(3): definitions.
• Sections 26 to 54: the general business income computation this section overrides.
• Section 33(11): carried-forward depreciation allowance excluded from adjusted total income.
• Sections 111(1), 112(1), 113(2), 115(2): carried-forward losses excluded.
• Chapter VIII: deductions excluded.