Interest paid on loan against fdr to earn interest

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

20 March 2015
Mr. X have Rs.5lacs FDR in Bank (Own Source)

Mr. X took Rs.4lacs loan on FDR for the PURPOSE of providing loan to other people at a higher rate than FDR rate.

Is this correct ?

Interest on FDR earned = XXX
Intt. on loan to other people = XXX
LESS : Intt. paid on loan =(xxx)

Net Taxable Interest = XXX U/s 57(iii)

Please provide relevant case, If possible.

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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20 March 2015 then int from fdr cannot be used to for claiming int on loan paid

but yes int on loan recieved to other person u can use to deduct int on loan paid to bank

Querist : Anonymous

Querist : Anonymous (Querist)

20 March 2015 Okay.

So I'm concluding this as below:

I'm earning interest income from other people & for which I'm paying loan interest to bank - This is allowed as per section 57 (iii) Expenditure wholly incurred for income.

In FDR interest I'm not incurring any expense so it's not allowed as deduction.

The above conclusion is right ?

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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20 March 2015 yes exactly u understood and additionally u need to show icnome from fd int as income from other sources and the net income from loan recieved and paid shall be also shown as income from other sources.

hopefully now all doubts cleared

Message likes : 1 times

Querist : Anonymous

Querist : Anonymous (Querist)

20 March 2015 IN ITR >

I will be showing the NET Interest income ?

But IN ITR there is an option for showing deduction under 57.

CS,CA F,Numrologi TusharSampat

CS,CA F,Numrologi TusharSampat (Expert)
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20 March 2015 yes in itr u can show as income recived -paid = net as there is schedule for income from other sources

Querist : Anonymous

Querist : Anonymous (Querist)

21 March 2015
Hi Tushar,

In continuation to the above.

I have gone through the ITR form & have encountered a problem with that.

The ITR Colums is adding the Gross interest & Internet earned togther and then less the deduction under 57(iii)

Further I would like to bring here that :

Interest earned have been on Cash basis
And Interest paid to bank are merely debited by bank in my SOD A/c (Secured overdraft)

The above adjustment of Interest is fine ?

SO IS THAT OK IF I JUST SHOW UP THE NET INTEREST EARNED DUE TO THIS LIMITING FACTOR ?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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01 August 2024 Yes, your understanding is correct regarding the treatment of interest earned and paid in this scenario. Here’s how you should handle it, including relevant sections and a summary of how to present this in your tax return:

### **Treatment of Interest Earned and Paid**

1. **Interest Earned on FDR:**
- This is considered income and should be included under "Income from Other Sources."

2. **Interest Paid on Loan Against FDR:**
- This interest can be claimed as a deduction under **Section 57(iii)** of the Income Tax Act. Section 57(iii) allows for deductions of expenses incurred to earn income from other sources, which in this case is the interest on the loan taken against the FDR.

3. **Interest Earned from Loan Provided to Others:**
- The interest received from the loans you provide to others is also considered income under "Income from Other Sources."

### **Calculation of Net Taxable Interest**

1. **Calculate Gross Interest Earned:**
- Interest earned on FDR: `XXX`
- Interest earned on loans provided to others: `XXX`
- **Total Gross Interest Earned**: `XXX + XXX`

2. **Deduct Interest Paid on Loan:**
- Interest paid on loan against FDR: `(XXX)`
- **Net Taxable Interest**: `Gross Interest Earned - Interest Paid`

### **Tax Return Filing**

- **In ITR Form:**
- Report the total interest earned (both from FDR and from loans) under "Income from Other Sources."
- Deduct the interest paid on the loan against FDR under **Section 57(iii)** while computing the taxable income.
- Ensure that the net interest income (after deduction) is correctly reflected in the tax computation.

### **Case Law Reference**

While specific case laws may vary, the treatment generally follows the principle outlined in **Section 57(iii)**. Here’s a relevant case for reference:

- **CIT vs. Anil Kumar Singhal (2006)**: The court held that expenses incurred to earn interest income, such as interest on borrowed funds used to invest in income-generating assets, are deductible under Section 57(iii).

### **Summary**

- **Interest Earned**: Include both FDR and loan interest in gross interest.
- **Interest Paid**: Deduct the interest paid on the loan against FDR under Section 57(iii).
- **Net Interest**: Report the net interest income (i.e., gross interest minus interest paid) as taxable income.

Ensure that these details are accurately filled out in the appropriate sections of the ITR form. If you encounter issues or discrepancies, it’s advisable to consult with a tax professional for personalized advice.

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