Taxability of subsidy received from government

This query is : Resolved

Ankit (Querist)
Follow

26 August 2015 If i have taken loan from a bank and on such loan govt is giving me subsidy in a way that now only 75% of the loan amt is to be repaid from my side. Then whether such 25% subsidy being received from government is taxable in any way?

CA Mohit Bansal

CA Mohit Bansal (Expert)
Follow

27 August 2015 Hi Ankit,

I guess subsidy under discussion is NABARD back end subsidy. The amount of subsidy shall be deducted from the cost of the Plant and Machinary purchased from such loan and hence reduced depreciation

Message likes : 1 times

Ankit

Ankit (Querist)
Follow

30 August 2015 Thanks for the response Mohit,

But here i am just talking about general case as in if i get a loan of RS. 40 Lacs and the amount of repayment to be made by me is Rs. 30 lacs only.
So in the above case the excess Rs. 10 lacs which i am getting which i have to not repay back to the bank because government would be paying back the same, so whether such extra Rs. 10 lacs recd is my income in any sort? If yes will the same be taxable?

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
Follow

26 July 2025 Great question! Let me clarify the **taxability of government subsidy on a loan** where you effectively get to repay less because the government subsidizes part of the loan.

---

### Scenario Recap:

* You took a loan of Rs. 40 lakhs.
* Due to government subsidy, you only need to repay Rs. 30 lakhs.
* The Rs. 10 lakhs subsidy is paid by the government (directly or indirectly).

---

### Tax Treatment of such subsidy:

1. **Is the subsidy income?**

* Generally, **government subsidies given to reduce the cost of an asset or a loan are not treated as taxable income.**

* Instead, this subsidy is considered a capital receipt or a reduction in the cost of the asset or liability.

2. **How to treat in accounts and tax?**

* **If subsidy is related to the purchase of an asset or loan taken to acquire an asset:**
The subsidy reduces the **cost of the asset** in your books.

* **If subsidy is to reduce the loan repayment:**
The amount of loan outstanding is effectively reduced. You treat the loan liability net of subsidy.

* **Depreciation impact:**
As Mohit said earlier, the reduced cost of asset (after subsidy) will lead to lower depreciation claim.

3. **Is subsidy taxable as income?**

* Generally **No**, such subsidies are **not taxed as income** under normal circumstances because they are not business income or gains but capital receipts or reduction in expenses.

* However, if the subsidy is in the form of cash received and credited to Profit & Loss without adjustment of asset cost or loan liability, it may become taxable.

4. **Specific references / clarifications:**

* **Income Tax Act does not specifically tax subsidy on loan forgiveness as income.**

* **Supreme Court rulings and CBDT clarifications** often treat such subsidies as capital receipts and not taxable as income.

---

### So, for your case:

* The Rs. 10 lakhs subsidy reducing your loan liability is **not taxable as income**.

* Instead, it should reduce the loan liability in your books, and corresponding adjustment in asset cost (if applicable) and depreciation.

---

### Important:

* Keep proper documentation from the government and bank regarding the subsidy.

* Treat accounting entries correctly to avoid tax issues.

---

If you want, I can help you with **the exact journal entries** or **how to reflect this in your financial statements and tax return**. Would you like that?

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now