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CS Executive · Tax Laws and Practice · Deductions

Sunrise Traders follows the mercantile system. For tax year 2026-27 it incurred interest of Rs. 2,00,000 on a loan from a scheduled bank, on which nothing was paid by the year end. Under section 37 of the Income-tax Act, 2025, which statement is correct?

The interest is deductible for 2026-27 if actually paid on or before the return due date under section 263(1) for that year. Section 37 requires actual payment for bank interest regardless of the accounting method, and conversion into a loan does not count as payment.

  1. AIt is deductible in 2026-27 whether or not paid, because of the mercantile method
  2. BIf paid on or before the due date for filing return for 2026-27 under section 263(1), it is deductible in 2026-27Correct
  3. CIt is deductible only in the year the bank converts it into a new loan
  4. DIt is never deductible because it was unpaid at year end

Explanation

Section 37(2)(e) covers interest to specified financial entities, including scheduled banks, allowed only when actually paid. Section 37(3) allows payment up to the return due date to count for the year of liability. Section 37(4) says conversion into a loan is not payment, so the third option is wrong.

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