In taxation, few words carry as much weight as the word “interest.” It is simple in daily language, but under the Income Tax Act, it covers far more than what most people imagine.
Section 2(28A) of the Income Tax Act defines the term “interest” in a broad and inclusive way, ensuring that any payment made for the use of borrowed money—no matter how it is described—is brought within the tax net.
Understanding Section 2(28A)
Section 2(28A) of the Income Tax Act, 1961, defines “interest” as follows:
“Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation), & includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.”
This legal definition may sound complex, but in simple terms, interest payable in any manner in respect of any moneys borrowed or debt incurred becomes taxable under this section.
It does not matter whether the payment is called “interest,” “service fee,” or “finance charge.” If the nature of payment is for using someone else’s money, it will fall under this definition.
The Objective Behind Section 2(28A)
The government introduced this wide definition to prevent taxpayers from avoiding tax by changing the description of payments.
Earlier, many transactions were structured as “service fees” or “charges” instead of “interest” to escape taxation. Section 2(28A) closed this loophole by covering all such payments linked to borrowed funds."
In essence, this section ensures that all income arising from the use or lending of money is properly brought under tax—irrespective of its label.
Breaking Down the Definition
Let’s decode the components of this section step by step:
- Interest Payable in Any Manner
Whether the payment is made monthly, quarterly, or even as a lump sum, the phrase “in any manner” ensures that all kinds of interest payments are included.
- In Respect of Any Moneys Borrowed or Debt Incurred
This covers every form of borrowing—bank loans, corporate borrowings, deposits, or even temporary debts created through trade transactions.
- Including Deposit, Claim, or Other Similar Right or Obligation
Even if the transaction is not a loan in the conventional sense, it may still be treated as such if money has been advanced & used.
- Including Service Fee or Other Charge
This ensures that additional costs like commitment fees, processing fees, or credit facility charges also qualify as interest for tax purposes.
Hence, Section 2(28A) gives the Income Tax Department the power to treat almost any payment related to borrowed money as “interest.”
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Illustrative Examples
Let’s look at how this section applies in real situations:
Example 1: Home Loan or Business Loan
A person taking a business loan from a bank pays ₹75,000 as interest. This is clearly covered under Section 2(28A) since it is interest payable in respect of moneys borrowed.
Example 2: Delayed Flat Possession
When a builder delays the handover of a flat, they often pay interest on amount deposited by allottees on account of delayed allotment of flats.
Such interest payments are considered taxable income for the buyer under “Income from Other Sources” and deductible for the builder as business expenditure.
Example 3: Commitment or Service Fees
Suppose a company has an unused credit line from a financial institution. Even if it pays a small commitment fee for that unused facility, that fee is still considered interest under this section.
Key Phrase: “Interest Payable in Any Manner”
This single phrase is the backbone of Section 2(28A). It ensures that the nature of payment takes priority over its title.
If the real purpose of a payment is to compensate for the use of borrowed funds, then it is taxable interest, regardless of the terminology used in the agreement.
For example:
- “Finance charge” on a car loan → Interest
- “Late payment fee” for overdue invoice → Interest
- “Compensation for delayed possession” → Interest
This section thus prevents manipulation of labels & ensures proper tax treatment.
Broader Interpretation – Interest in a Wider Sense
Section 2(28A) defines interest in a wider sense.
It covers not only traditional loan interest but also any financial charge associated with borrowed or delayed money.
Even if the payment arises indirectly—such as through delay, deposit, or claim—it still counts as interest.
In short, the law looks beyond wording & focuses on the purpose—if someone earned money for letting others use their funds, it is taxable.
Taxability of Interest under Section 2(28A)
Once a payment qualifies as interest under this section, the next step is to determine its tax treatment.
For Individuals
- Interest from fixed deposits, bonds, or builder delays is taxable under the head Income from Other Sources."
- Exemptions may apply only where specific provisions (like Section 10(15)) grant relief.
For Businesses
- Interest paid on loans, overdrafts, or trade credits is allowable as deduction under Section 36(1)(iii) or Section 43B(d), provided the relevant conditions are met.
- However, TDS under Section 194A must be deducted before payment, failing which the expense may be disallowed.
Special Application in Real Estate Cases
In recent years, several judgments have confirmed that interest received from builders on delayed allotment is taxable as interest income under Section 2(28A).
Even though buyers often consider it a form of compensation, the Income Tax Act treats it as interest payable in any manner in respect of money borrowed or used by the builder.
Hence, this section plays a major role in resolving real estate tax disputes between developers & buyers.
Also Read: Tax-Free Interest Income You Might Be Missing Out On!
Interconnection with Other Tax Provisions
Section 2(28A) acts as the base definition for multiple sections in the Act.
It directly influences the application of the following provisions:
- Section 194A: TDS on interest (other than securities)
- Section 36(1)(iii): Deduction for interest on borrowed capital
- Section 56: Taxability under “Income from Other Sources”
- Section 43B(d): Deduction allowed only on actual payment of interest
- Section 10(15): Exemption for specific interest income (like NRE deposits)
Therefore, understanding Section 2(28A) is critical for both taxpayers & professionals while computing total income or claiming deductions.
Judicial Interpretations and Practical Impact
Over the years, courts have clarified that the essence of the payment, not the nomenclature, decides its taxability.
The Supreme Court & High Courts have consistently ruled that “interest payable in any manner in respect of moneys borrowed or debt incurred” includes:
- Delay charges,
- Compensation for deferred payments,
- Service or commitment fees linked to loan usage.
Thus, the focus remains on whether the payment represents consideration for the use of borrowed money.
Interest and Electoral Trust Contributions
Although primarily related to borrowing transactions, Section 2(28A) also indirectly covers special provisions relating to voluntary contributions received by electoral trusts.
Any interest income earned by such trusts on contributions before distribution to political parties is taxable under this definition.
This ensures financial transparency even in the domain of political funding.
Compliance and Record-Keeping
Taxpayers—especially businesses—must carefully document:
- The purpose of payment,
- The relationship with borrowed funds, and
- TDS compliance under Section 194A.
Inadequate classification or missed deduction can invite penalties or disallowance of expenses during assessment.
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Key Takeaways
- Section 2(28A) defines interest payable in any manner in respect of any moneys borrowed or debt incurred, including service fees, other charges, and commitment fees.
- The section defines interest in a wider sense, bringing all such payments under taxation.
- Builders, homebuyers, lenders, & businesses must apply this definition while reporting income or expenses.
- Mislabeling interest as compensation or service charge does not change its taxability.
Simply put, if money has been used and a payment is made for that use — it is interest under this law.
Conclusion
Section 2(28A) of the Income Tax Act is one of the most comprehensive definitions in Indian tax law. It ensures that all interest payable in any manner in respect of any moneys borrowed or debt incurred, along with any service fee or other charge, is treated as taxable interest income.
This provision leaves no scope for ambiguity. Whether it’s interest on amount deposited by allottees on account of delayed allotment of flats, or charges for unused credit facilities, all fall under this definition.
It maintains the integrity of the taxation system by ensuring every monetary gain from borrowed money is properly disclosed & taxed.
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