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A company owes ₹200 lakh of interest on a term loan from a scheduled bank for tax year 2026-27. Before the return due date it converts the whole unpaid interest into debentures and pays nothing in…

Question and options

A company owes ₹200 lakh of interest on a term loan from a scheduled bank for tax year 2026-27. Before the return due date it converts the whole unpaid interest into debentures and pays nothing in cash. How is the interest treated under section 37 of the Income-tax Act, 2025?

  1. Deductible now, because conversion into debentures counts as payment

  2. Deductible now, because the conversion took place before the return due date

  3. Not deductible now; deductible when the debentures are actually paid

  4. Not deductible now, and not deductible later when the debentures are paid

Answer and explanation

Correct answer: C - Not deductible now; deductible when the debentures are actually paid

Section 37(4) of the Income-tax Act, 2025 provides that interest converted into a loan, debenture or other instrument deferring payment is not deemed to have been actually paid, so the payment-based deduction under section 37 is postponed until the interest is actually paid. Payment before the return due date would save the deduction only if it were a real payment, which conversion is not.

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