Treatment of the interest income

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This query is : Resolved

BHASKAR AUDDY (Querist)

09 May 2011 One of our client in real estate business developing various types of flats, commercial plots and later on selling the same. For the viriuos reasons they have to give variuos types of bank guarantees to variuos authorities.For issuing the bank guarantees,bank is keeping margin money. On this margin money bank give interest on a regular basis.
Whether this interest income need to be deducted from the project cost or should we credit this to the Profit & Loss Accoubt as income?

Amol Gopal Kabra (CA,CS,DISA)

Amol Gopal Kabra (CA,CS,DISA) (Expert)

09 May 2011 The income should be treated as other income and shown under the Other Income head credited to Profit and Loss Account.

BHASKAR AUDDY

BHASKAR AUDDY (Querist)

09 May 2011 Please provide any reference.

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

02 August 2025 Regarding **treatment of interest income on margin money held by bank against bank guarantees** in real estate projects:

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### Treatment:

* The **interest earned on margin money** kept with the bank is **not directly related to the project cost**.
* It is **income arising from funds temporarily blocked**, not a reduction in project expenses or cost of construction.
* Hence, **interest income should be recognized separately as "Other Income"** in the Profit & Loss account.

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### Reference/Accounting Guidance:

* **AS 2 (Valuation of Inventories)** and **AS 16 (Borrowing Costs)**:

* Interest income on margin money is not related to project inventory cost nor borrowing costs directly attributable to construction.
* So, it should not be deducted from project cost.

* **Companies (Accounting Standards) Rules, 2006** clarify that income earned on deposits or margin money should be treated as income of the period.

* Also, in **Income Tax Act**, such interest income is taxable under **‘Income from Other Sources’** or **‘Business Income’** (depending on facts), not adjusted against cost.

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### Summary:

| Item | Treatment |
| ------------------------ | --------------------------------------- |
| Interest on margin money | Credit to Profit & Loss as Other Income |

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If you want, I can help draft the journal entry for this.

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