Quick Summary
The Indian government is currently reviewing a proposal to amend the Income Tax Act to align the definition of Non-Performing Assets (NPAs) with that of the Reserve Bank of India (RBI)-a move that could significantly ease tax burdens for banks and financial institutions. As it stands, there is a key mismatch in NPA classification: The RBI classifies loans as NPAs if interest or principal remains overdue for more than 90 days. While under the Income Tax Act, this period extends to more than
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FAQ :
The government is considering amending the Income Tax Act to align the definition of Non-Performing Assets (NPAs) with the Reserve Bank of India's (RBI) 90-day overdue period, instead of the current longer period under tax law.
The RBI classifies loans as NPAs if interest or principal is overdue for more than 90 days, whereas the Income Tax Act considers this period to be more than six months.
This disconnect can lead to banks being taxed on notional interest income that has not yet been recognised in their accounts, creating unjust tax liabilities, particularly for loans overdue between 90 and 180 days.
A committee comprising tax officials, industry representatives, and members from the Institute of Chartered Accountants of India (ICAI) is reviewing the matter as part of broader draft Income Tax Law reforms.
Banks are also requesting increased deductions for NPA provisions, seeking to raise the current cap from 8.5% to 15% of gross total income.
If approved, the changes could improve banks' financial performance by reducing tax burdens, decreasing litigation, and ensuring fairer tax treatment in line with RBI norms and global best practices.
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