Draft Rule 42 of the Draft Income-tax Rules, 2026 lays down a special provision regarding interest on bad and doubtful debts for specified financial institutions under Section 56 of the Act. It applies to public financial institutions, scheduled banks, State financial corporations, State industrial investment corporations, and certain public companies engaged in housing finance. The rule specifies that interest income relating to loans, advances, overdrafts, cash credits, bills purchased or discounted, securitisation transactions, derivative receivables, and agricultural loans will be treated under Section 56 if the amounts remain overdue for more than 180 days or beyond prescribed crop seasons. It also covers accounts with irregular drawings for 180 days, unreviewed credit limits, and cases involving significant erosion in the value of security. For public housing finance companies, the rule defines doubtful assets and non-performing assets based on 180-day overdue criteria across various credit facilities, including term loans, call loans, bills, receivables, lease rentals, and hire purchase instalments. Loss assets identified as uncollectible but not written off are also covered. The rule further clarifies definitions such as “out of order” accounts, crop duration, and public company eligibility, ensuring uniform classification of bad and doubtful debts for interest taxation purposes.
Extract of Rule No. 42 of Draft Income-tax Rules, 2026
Rule 42
Special provision regarding interest on bad and doubtful debt of specified financial institution
(1) The provisions of section 56 shall apply in the case of every public financial institution, scheduled bank, State financial corporation and State industrial investment corporation if its income from interest is related to following categories of bad or doubtful debts, namely:––
(a) in relation to a loan or advance, where,––
i. interest and/ or instalment of principal remains overdue for a period of more than 180 days;
ii. the account remains out of order in respect of an Overdraft/Cash Credit;
iii. the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,
iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops;
v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops;
vi. the amount of liquidity facility remains outstanding for more than 180 days for a securitisation transaction undertaken in terms of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021;
(vii) in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 180 days from the specified due date for payment;
(b) in relation to an account, where,––
i. a working capital borrowal account with irregular drawings for a continuous period of 180 days even though the unit may be working or the borrower’s financial position is satisfactory and for this purposes the outstanding in the account based on drawing power calculated from stock statements older than six months would be deemed as irregular;
ii. the regular/ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction;
iii. there is erosion in the value of security and the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by Reserve Bank of India at the time of last inspection;
iv. the realisable value of the security, as assessed by the bank or approved valuers or Reserve Bank of India is less than 10 per cent of the outstanding in the borrowal accounts.
(2) The provisions of section 56 shall apply in the case of every public company where its income by way of interest pertains to the following category of bad and doubtful debts, namely:––
(a) (i) 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;
(ii) non-performing asset referred to in sub-clause (i) shall be the following:––
A. an asset, in respect of which, interest has remained overdue for a period of more than 180 days;
B. a term loan (other than the one granted to an agriculturist or to a person whose income is dependent on the harvest of crops) inclusive of unpaid interest, when the instalment is overdue for a period of more than 180 days or more or on which interest amount remained overdue for a period of more than 180 days;
C. a demand or call loan, which remained overdue for a period of more than 180 days from the date of demand or call or on which interest amount remained overdue for a period of more than 180 days;
D. a bill which remains overdue for a period of more than 180 days;
E. the interest in respect of a debt or the income on receivables under the head ‘other current assets’ in the nature of short-term loans/ advances, which facility remained overdue for a period of more than 180 days;
F. any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of more than 180 days;
G. the lease rental and hire purchase instalment, which has become overdue for a period of more than 180 days;
H. a term loan granted to an agriculturist or to a person whose income is dependent on the harvest of crops if the instalment of principal or interest thereon remains unpaid––
i. for two crop seasons beyond the due date if the income of the borrower is dependent on short duration crops; or
ii. for one crop season beyond the due date if the income of the borrower is dependent on long duration crop.
(I) in respect of loans, advances and other credit facilities (including bills purchased and discounted), the balance outstanding under the credit facilities (including accrued interest) made available to the same borrower/ beneficiary when any of the above credit facilities becomes non-performing asset.
(b) 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.
(3) For the purposes of this rule––
(a) an Overdraft/Cash Credit account shall be treated as ‘out of order’ if––
i. the outstanding balance in the Overdraft/Cash Credit account remains continuously in excess of the sanctioned limit/drawing power for 180 days; or
ii. the outstanding balance in the Overdraft/Cash Credit account is less than the sanctioned limit/drawing power but there are no credits continuously for 180 days, or the outstanding balance in the Overdraft/Cash Credit account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 180 days period.
(b) “long duration crop” means crop with crop season longer than one year;
(c) “short duration crop” means crop which is not a long duration crop;
(d) the crop season for each crop means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State.
(e) “public company” means a company,––
i. which is a public company within the meaning of section 2(71) of the Companies Act, 2013;
ii. 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
iii. 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 Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021.
