Section 56 — Special provision in case of interest income of specified financial institutions. Successor to s.43D of the 1961 Act.
Section 56 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) overrides anything to the contrary in the Act and fixes the year of charge for one kind of receipt: interest income in relation to bad or doubtful debts of a specified financial institution is chargeable under "Profits and gains of business or profession" in the tax year in which the interest is credited to the profit and loss account, or actually received, whichever is earlier.
Sub-section (2) supplies the two definitions the rule turns on. A "specified financial institution" is a public financial institution, a scheduled bank, a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, a State Financial Corporation, a State Industrial Investment Corporation, or any such class of non-banking financial companies as the Central Government may notify. "Bad or doubtful debts" are such categories of debts as may be prescribed, having regard to the guidelines issued in relation to such debts by the Reserve Bank of India.
Interest on a loan that has gone bad keeps accruing on paper long after any prospect of collection has gone, and taxing it on accrual would tax income the lender may never receive. The section substitutes a receipt-or-recognition test for accrual, and it does not leave the lender to decide which debts qualify — the categories are prescribed with regard to Reserve Bank of India guidelines.
This is a timing rule and nothing more — the interest is taxed, only later. Both limbs bite, and the earlier of them governs: crediting the interest to the profit and loss account brings it to charge even though nothing has been collected, so a lender that recognises the income in its books cannot then defer it for tax. The relief is confined twice over, once by the closed list of institutions in sub-section (2)(a) and again by the categories of debt prescribed under sub-section (2)(b); a lender outside the list, or a debt outside the prescribed categories, stays on the ordinary basis of charge. A non-banking financial company gets nothing from this section unless its class has been notified.
A scheduled bank holds a loan falling in a prescribed bad or doubtful category. Interest of 40 lakh rupees accrues on it during a tax year, but the bank neither credits it to the profit and loss account nor recovers anything. Nothing is charged that year. If it recovers 15 lakh in the following year, that 15 lakh is charged in the year of receipt; and if in a later year it credits the balance of the interest to the profit and loss account without recovering it, the credited amount is charged then.
In the computation of a bank's or financial institution's business income, and in an assessment where the Assessing Officer proposes to add interest accrued on non-performing advances. A borrower never meets this section — it governs the lender's year of charge, not the borrower's deduction.
the interest income in relation to bad or doubtful debts of a specified financial institution shall be chargeable to tax under the head "Profits and gains of business or profession" in the tax year in which such interest is— (a) credited to the profit and loss account; or (b) actually received, whichever is earlier
"bad or doubtful debts" shall be such categories of debts, as may be prescribed, having regard to the guidelines issued in relation to such debts by the Reserve Bank of India
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
See the notifications index.