Rule 42 — Special provision regarding interest on bad and doubtful debt of specified financial institution. Made under s.56 of the Income-tax Act, 2025.
Rule 42 gives effect to Section 56 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) identifies the categories of bad or doubtful debts for which section 56 applies to a public financial institution, scheduled bank, State Financial Corporation and State Industrial Investment Corporation. In relation to a loan or advance, clause (a) covers: interest or an instalment of principal overdue for more than one hundred and eighty days; an overdraft or cash credit account that remains out of order; a bill overdue for more than one hundred and eighty days in the case of bills purchased and discounted; an instalment of principal or interest overdue for two crop seasons for short duration crops; the same overdue for one crop season for long duration crops; a liquidity facility outstanding for more than one hundred and eighty days for a securitisation transaction under the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021; and, for derivative transactions, overdue receivables representing positive mark-to-market value of a derivative contract unpaid for one hundred and eighty days from the specified due date for payment. In relation to an account, clause (b) covers: a working capital borrowal account with irregular drawings for a continuous period of one hundred and eighty days even though the unit may be working or the borrower's financial position is satisfactory, with outstandings based on drawing power calculated from stock statements older than six months deemed irregular; regular or ad hoc credit limits not reviewed or renewed within one hundred and eighty days from the due date or date of ad hoc sanction; erosion in the value of security where realisable value is less than 50% of the value assessed by the bank or accepted by the Reserve Bank of India at the last inspection; and realisable value, as assessed by the bank, approved valuers or the Reserve Bank of India, less than 10% of the outstanding in the borrowal accounts.
Sub-rule (2) does the same for a public company, on a two-part definition. A doubtful asset is a debt which has remained a non-performing asset of the specified nature for a period exceeding two years, and the non-performing assets listed are: an asset on which interest has remained overdue more than one hundred and eighty days; a term loan, other than one granted to an agriculturist or a person whose income depends on the harvest of crops, inclusive of unpaid interest, where the instalment or the interest is overdue more than one hundred and eighty days; a demand or call loan overdue more than one hundred and eighty days from the date of demand or call, or with interest so overdue; a bill overdue more than one hundred and eighty days; interest on a debt or income on receivables under 'other current assets' in the nature of short-term loans or advances overdue more than one hundred and eighty days; dues on account of sale of assets, services rendered or reimbursement of expenses overdue more than one hundred and eighty days; lease rental and hire purchase instalments overdue more than one hundred and eighty days; a term loan to an agriculturist or a person dependent on the harvest of crops where principal or interest remains unpaid for two crop seasons beyond the due date for short duration crops or one crop season beyond the due date for long duration crops; and the balance outstanding, including accrued interest, under all credit facilities to the same borrower or beneficiary once any of those facilities becomes a non-performing asset. A loss asset is an asset identified as a loss asset and considered as uncollectible but not written off by the assessee.
Sub-rule (3) defines the terms the tests turn on. An overdraft or cash credit account is "out of order" if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power for one hundred and eighty days, or if it is below that limit but there are no credits continuously for one hundred and eighty days, or credits are not enough to cover the interest debited during the previous one hundred and eighty day period. A long duration crop is a crop with a crop season longer than one year, and a short duration crop is one that is not a long duration crop; the crop season for each crop is the period up to harvesting of the crops raised, as may be determined by the State Level Bankers' Committee in each State. "Public company" is narrow: a public company within the meaning of section 2(71) of the Companies Act, 2013, whose main object is carrying on the business of providing long-term finance for construction or purchase of house in India for residential purposes, and which is registered under section 29A of the National Housing Bank Act, 1987 or in accordance with the Housing Finance Companies (nhb) Directions, 1989 or the Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021.
Section 56 changes when interest on a bad or doubtful debt is brought to tax for the institutions it covers, but it does not say which debts count as bad or doubtful, and lenders and the Department would otherwise argue that question account by account. Rule 42 answers it with the same objective markers a lender already uses for prudential classification — days overdue, out-of-order accounts, erosion of security — so the tax position follows a test that is verifiable from the loan records. Sub-rule (3) closes the definitional gaps that would otherwise reopen the argument.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Overdue period for interest or an instalment of principal on a loan or advance | More than one hundred and eighty days | Interest or instalment of principal remains overdue | Rule 42(1)(a)(i) |
| Overdue period for a bill purchased and discounted | More than one hundred and eighty days | The bill remains overdue | Rule 42(1)(a)(iii) |
| Overdue period for short duration crops | Two crop seasons | Instalment of principal or interest thereon remains overdue; crop season is the period up to harvesting, as determined by the State Level Bankers' Committee | Rule 42(1)(a)(iv) |
| Overdue period for long duration crops | One crop season | Instalment of principal or interest thereon remains overdue | Rule 42(1)(a)(v) |
| Period a securitisation liquidity facility may remain outstanding | More than one hundred and eighty days | Securitisation transaction undertaken in terms of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 | Rule 42(1)(a)(vi) |
| Period overdue derivative receivables may remain unpaid | One hundred and eighty days from the specified due date for payment | Overdue receivables representing positive mark-to-market value of a derivative contract | Rule 42(1)(a)(vii) |
| Period of irregular drawings in a working capital borrowal account | A continuous period of one hundred and eighty days | Applies even though the unit may be working or the borrower's financial position is satisfactory | Rule 42(1)(b)(i) |
| Age of stock statements that makes drawing-power outstandings irregular | Older than six months | Outstanding in the account based on drawing power calculated from such statements is deemed irregular | Rule 42(1)(b)(i) |
| Period within which regular or ad hoc credit limits must be reviewed or renewed | One hundred and eighty days from the due date or date of ad hoc sanction | Failure to review or renew within that period brings the account within the rule | Rule 42(1)(b)(ii) |
| Erosion in the value of security | Realisable value less than 50% of the value assessed | Value assessed by the bank or accepted by the Reserve Bank of India at the time of last inspection | Rule 42(1)(b)(iii) |
| Realisable value of security against outstandings | Less than 10% of the outstanding in the borrowal accounts | As assessed by the bank or approved valuers or the Reserve Bank of India | Rule 42(1)(b)(iv) |
| Period for which a non-performing asset must persist to be a doubtful asset of a public company | Exceeding two years | The debt has remained a non-performing asset of the nature specified in rule 42(2)(a)(ii) | Rule 42(2)(a)(i) |
| Overdue period across the public company's listed non-performing asset categories | More than one hundred and eighty days | Interest, term loan instalments, demand or call loans, bills, short-term advances, sale or service dues, and lease or hire purchase instalments | Rule 42(2)(a)(ii)(A) to (G) |
| Period an overdraft or cash credit account must be in excess, or without sufficient credits, to be out of order | One hundred and eighty days | Continuous excess over sanctioned limit or drawing power, or no credits continuously, or credits not enough to cover interest debited during the previous one hundred and eighty day period | Rule 42(3)(a) |
| Crop season that makes a crop a long duration crop | Longer than one year | Any other crop is a short duration crop | Rule 42(3)(b) and (d) |
The rule classifies debts; it does not decide the tax treatment, which is section 56's. Two consequences follow from that division. First, an institution outside the five classes in sub-rules (1) and (2) gets nothing from this rule however overdue its debts, and "public company" here is not the Companies Act meaning alone — rule 42(3)(c) adds the housing-finance object and the registration requirement, so an ordinary public company is outside it. Second, the tests are objective and some of them bite on a healthy borrower: rule 42(1)(b)(i) says so expressly, catching an account with irregular drawings for a continuous one hundred and eighty days even though the unit may be working or the borrower's financial position is satisfactory. Note also that the two-year test in sub-rule (2) is a second layer, not an alternative — the asset must first be a non-performing asset of the listed nature and then have remained so for a period exceeding two years — and that once any one facility of a borrower becomes non-performing, rule 42(2)(a)(ii)(I) pulls in the balance outstanding under all his facilities, including accrued interest.
A scheduled bank has a cash credit account with a sanctioned limit of Rs. 2 crore. The balance stays at Rs. 1.8 crore, inside the limit, but no credits are received for a continuous one hundred and eighty days. The account is out of order under rule 42(3)(a)(ii) even though the limit was never exceeded, so the interest on it falls within the categories in rule 42(1)(a)(ii) and section 56 applies to that interest. Had the borrower deposited enough to cover the interest debited in that period, the account would not have been out of order on this test.
A borrower never meets this rule; the lender does, in its own asset classification records and in the reconciliation between its books and its return, and the Assessing Officer meets it when testing an institution's claim that interest on a particular account is governed by section 56.
a working capital borrowal account with irregular drawings for a continuous period of one hundred and eighty days even though the unit may be working or the borrower's financial position is satisfactory
doubtful asset, that is, a debt which has remained a non-performing asset of the nature specified in sub-clause (ii) for a period exceeding two years
loss asset, that is, an asset which has been identified as loss asset and considered as uncollectible but has not been written off by the assessee
