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Rule 42Published

Rule 42: Interest on specified bad and doubtful debts

Rule 42 identifies categories of bad and doubtful debts for section 56. Its tests depend on the type of institution, credit facility and account condition; the defined “public company” category is narrower than every company that happens to be public.

Official notified Income-tax Rules, 2026

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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,:–– (a) in relation to a loan or advance, where,–– (i) interest or instalment of principal remains overdue for a period of more than one hundred and eighty days; or (ii) the account remains out of order in respect of an overdraft or cash credit; or (iii) the bill remains overdue for a period of more than one hundred and eighty days in the case of bills purchased and discounted; or (iv) the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops; or (v) the instalment of principal or interest thereon remains overdue for one crop season for long duration crops; or (vi) the amount of liquidity facility remains outstanding for more than one hundred and eighty days for a securitisation transaction undertaken in terms of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021; or (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 one hundred and eighty days from the specified due date for payment; and (b) in relation to an account, where,–– (i) 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 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; or (ii) the regular or ad hoc credit limits have not been reviewed or renewed within one hundred and eighty days from the due date or date of ad hoc sanction; or (iii) there is erosion in the value of security and the realisable value of the security is less than 50% of the value assessed by the bank or accepted by Reserve Bank of India at the time of last inspection; or (iv) the realisable value of the security, as assessed by the bank or approved valuers or Reserve Bank of India is less than 10% 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,:–– (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 one hundred and eighty 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 one hundred and eighty days or more or on which interest amount remained overdue for a period of more than one hundred and eighty days; (C) a demand or call loan, which remained overdue for a period of more than one hundred and eighty days from the date of demand or call or on which interest amount remained overdue for a period of more than one hundred and eighty days; (D) a bill which remains overdue for a period of more than one hundred and eighty 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 or advances, which facility remained overdue for a period of more than one hundred and eighty 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 one hundred and eighty days; (G) the lease rental and hire purchase instalment, which has become overdue for a period of more than one hundred and eighty 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 or beneficiary when any of the above credit facilities becomes non-performing asset; and (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 or cash credit account shall be treated as ―out of order‖ if–– (i) the outstanding balance in the overdraft or cash credit account remains continuously in excess of the sanctioned limit or drawing power for one hundred and eighty days; or (ii) the outstanding balance in the overdraft or cash credit account is less than the sanctioned limit or drawing power but there are no credits continuously for one hundred and eighty days, or the outstanding balance in the overdraft or cash credit account is less than the sanctioned limit or drawing power but credits are not enough to cover the interest debited during the previous one hundred and eighty days period; (b) ―long duration crop‖ means crop with crop season longer than one year; (c) ―public company‖ means a company,–– (i) which is a public company within the meaning of section 2(71) of the Companies Act, 2013 (18 of 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 (53 of 1987) or in accordance with the Housing Finance Companies (NHB) Directions, 1989 or Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 issued by the local Government. (d) ―short duration crop‖ means crop which is not a long duration crop; (e) ―the crop season for each crop‖ means the period up to harvesting of the crops raised, as may be as determined by the State Level Bankers‘ Committee in each State;

Rule breakdown

Identify which institutional category applies

Sub-rule (1) names public financial institutions, scheduled banks, State Financial Corporations and State Industrial Investment Corporations. Sub-rule (2) applies to the public companies defined in sub-rule (3)(c).

That definition requires the stated Companies Act status, the main object of long-term residential housing finance in India, and the prescribed registration or directions route. Do not apply sub-rule (2) to every public company or ordinary trade creditor.

Classify the loan or facility before counting days

For the institutions in sub-rule (1), the listed loan and advance tests include overdue interest or principal, out-of-order overdraft or cash-credit accounts, overdue bills, specified securitisation liquidity facilities and derivative receivables.

The exact wording matters: several tests use more than 180 days, while the derivative receivable wording uses a period of 180 days from the specified payment due date. Preserve the relevant test instead of applying one universal age threshold.

Use crop seasons for the stated agricultural facilities

The agricultural tests distinguish two crop seasons for short-duration crops and one crop season for long-duration crops. A long-duration crop has a season longer than one year; the short-duration definition covers other crops.

The State Level Bankers’ Committee determines the crop season period up to harvesting. Keep the crop, season and instalment evidence rather than replacing the rule with an assumed number of calendar days.

Check account conduct and security evidence

The account tests address sustained irregular drawings, credit-limit review or renewal delays, and the two security-value conditions. The first security comparison is against the previously assessed or accepted value; the second compares realisable security value with the outstanding borrowal amount.

For working-capital drawing power, stock statements older than six months matter under the specified irregular-drawing rule. Use the relevant valuation, statement and review dates to support classification.

Apply the defined out-of-order test

An overdraft or cash-credit account can be out of order if its balance continuously exceeds the sanctioned limit or drawing power for 180 days. The definition also covers an account below those levels with no credits continuously for 180 days, or credits insufficient to cover interest debited during the previous 180 days.

An account being within its formal limit therefore does not by itself end the enquiry. Review credits and interest as well as the balance and drawing power.

Separate doubtful assets from loss assets for housing-finance companies

For the defined public-company category, a doubtful asset is a debt that has remained a non-performing asset of the stated nature for more than two years. The rule lists the relevant non-performing facilities, including the specified agricultural and same-borrower credit facilities.

A loss asset is separately described as identified and considered uncollectible but not written off. Do not replace these categories with a single label such as overdue debt.

Maintain a classification-to-tax reconciliation

Record institutional eligibility, facility type, due dates, account behaviour, crop-season evidence and any security valuation. Map each debt to its exact provision before applying section 56.

This classification exercise does not itself establish a bad-debt deduction or settle every accounting classification. The rule supplies the categories for the linked interest provision.

Key takeaways

Institution and facility matter

Use the applicable sub-rule and the correct type of credit facility.

Public company is defined

The special definition targets qualifying residential housing-finance companies.

Different timing tests

Day counts, crop seasons and the doubtful-asset period are distinct.

Keep supporting evidence

Balances, credits, valuations and dates must support the chosen category.

Practical checklist

  • Identify the institution and credit facility first.
  • Keep due-date, crop-season and account-credit evidence.
  • Apply the exact valuation comparator and time period.

Avoid

  • Do not extend the housing-finance definition to every public company.
  • Do not replace different statutory tests with one overdue threshold.

FAQs

Does sub-rule (2) apply to every public company?

No. Rule 42(3)(c) requires all of its stated status, main-object and registration conditions.

Is every test simply more than 180 days overdue?

No. The rule contains different overdue, out-of-order, crop-season, security-value and classification tests. Read the specific category.

Can an account within its sanctioned limit still be out of order?

Yes. The definition also considers an absence of credits or credits insufficient to cover the relevant interest.

Does the rule itself grant a deduction for writing off a debt?

No. It identifies bad or doubtful debt categories for the section 56 interest provision.

Glossary

Out of order
The overdraft or cash-credit condition defined by Rule 42(3)(a), including its balance and credit tests.
Long-duration crop
A crop with a crop season longer than one year.
Loss asset
For sub-rule (2), an asset identified as a loss and considered uncollectible but not written off.

Official sources