Skip to content

CS Executive · Tax Laws and Practice · Deductions

A firm accrued interest of Rs. 2 lakh in the tax year on a term loan from a scheduled bank, as per the loan agreement, but did not pay it. Under section 37 of the Income-tax Act, 2025, which treatment is correct?

Interest on a scheduled bank loan is deductible on actual payment basis, but if paid on or before the due date for filing the return for that tax year, it is allowed in the year it was incurred. Accrual alone or conversion into a loan does not qualify.

  1. ADeductible in the tax year on accrual, since the firm follows the mercantile system
  2. BDeductible in that tax year if it is actually paid on or before the due date of filing return under section 263(1) for that yearCorrect
  3. CDeductible only in the year of payment, and never in the accrual year even if paid before the return due date
  4. DDeductible in that tax year if the interest is converted into a fresh loan before the return due date

Explanation

Section 37(2)(e) covers interest on borrowings from specified financial entities, including scheduled banks, and allows it only on payment, regardless of the accounting method. Section 37(3) allows it in the accrual year if paid by the return due date. Conversion into a loan is not payment under section 37(4).

Did you get it right without looking?

One question tells you little. A timed set on Deductions shows your real accuracy, how long you take and where you lose marks.

Practise DeductionsFree diagnostic mock

More Deductions questions