NPA Interest Tax Relief What Are Banks Proposing?
Banks have urged the government to reconsider the taxability of interest income on NPAs (Non-Performing Assets), which is currently taxed on an accrual basis in many cases—despite no actual receipt. This proposal, reportedly under CBDT review in June 2025, could ease the tax burden on banks and align with real income principles.
What’s the Current Tax Treatment of NPA Interest?
Under Section 43D of the Income-tax Act, 1961, certain notified institutions (like scheduled banks and NBFCs) are allowed to recognize interest income from NPAs only on receipt basis. However, gaps remain:
| Particulars | Current Tax Treatment |
|---|---|
| Scheduled Banks | Taxed on receipt basis (Sec 43D) |
| Rural or Cooperative Banks | Benefit available only if notified |
| NBFCs | Notified NBFCs allowed receipt basis only |
| Other Institutions | Often taxed on accrual unless notified |
🔍 Note: RBI’s Income Recognition guidelines mandate NPA provisioning, but tax laws don’t always mirror this treatment.
Why Are Banks Seeking Relief?
Banks argue that taxing unrealised NPA interest inflates their taxable income and hurts profitability during downturns.
Key Concerns Raised:
- Contradiction between RBI provisioning norms and tax laws.
- Cash flow mismatch: Tax paid on income not received.
- NBFCs face disparity unless specially notified.
- Impacts capital adequacy and loan recovery strategies.
Legal & Regulatory Context
- Section 43D (inserted via Finance Act, 1999) provides for interest recognition on receipt for specified institutions.
- CBDT Notification No. 102/2014 expanded benefit to certain NBFCs.
- Courts have upheld “real income” theory in Southern Technologies Ltd. v. JCIT (2010) 320 ITR 577 (SC), but also emphasized statutory limitations.
What Could Change?
If CBDT accepts the proposal:
- More institutions (especially NBFCs) may be included under Section 43D.
- A uniform definition of NPA for tax purposes may be notified.
- Potential amendments in the Income-tax Act or Notifications may follow Budget 2026.
✅ This could improve alignment between tax law and RBI norms, reducing litigation and easing compliance.
Expert View: Real Income Should Guide Taxation
According to tax experts, “taxing income that hasn’t been received violates the principle of real income recognition”. A more aligned tax treatment will reflect the actual financial health of banks and NBFCs and encourage transparent NPA disclosure.
How Efiletax Helps
If you’re a financial institution, NBFC, or CA firm navigating complex NPA tax implications, Efiletax offers:
- Real-time tax compliance updates
- Expert consultancy on Section 43D notifications
- End-to-end tax filing and assessment support
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FAQ: NPA Interest Taxation
Q1. Is interest on NPAs taxable under current law?
Yes, unless covered by Section 43D, NPA interest is taxed on accrual.
Q2. What does Section 43D provide?
It allows certain notified entities to tax NPA interest only when actually received.
Q3. Will this proposal change NPA interest rules for all lenders?
Not immediately. The proposal is under review and changes may come via future notifications or Budget amendments.
Summary
Banks have proposed tax relief on NPA interest, arguing that unrealised income shouldn’t be taxed. CBDT is reviewing this request under Section 43D of the Income-tax Act. If accepted, more institutions may benefit from taxing NPA interest only on receipt basis, aligning with real income principles.