When you hear the word “interest”, the first thought is usually bank deposits or loan EMIs. Makes sense. In everyday life, interest feels very straightforward. But in tax law, words are rarely that simple. The Income Tax Act gives precise meanings to key financial terms so there is no confusion in assessments. And that’s exactly what Section 2(28) of the Income Tax Act attempts to do.
It defines what “interest” means when computing taxes. And trust me, the scope is broader than most people think.
Now, why should a business owner, a salaried taxpayer, a banker, or even a finance professional care? Because the right interpretation decides whether you get a tax deduction or end up with a disallowance. And in tax, every rupee saved legally matters.
What Section 2(28) Really Says
Under Section 2(28), interest payable in any manner in respect of any moneys borrowed or debt incurred is considered interest for tax purposes. That’s not all. It further includes payment in the form of interest, service fee, or other charge that arises from a borrowing arrangement. So even if it's called by a fancy name like “processing fee”, “commitment costs”, or “finance service charge”… if it's related to borrowing, there's a good chance it's interest in the eyes of the tax law.
And this matters, because whenever a financial transaction involves debt, lenders and borrowers must consider TDS, reporting, and deduction rules.
Impact on Business & Section 28 Link
Section 2(28) cross-refers to clause (iiia) of section 28, which deals with the taxation of profits and gains from business or profession.
Meaning? Any interest earned as a part of business operations can become business income, not just income from other sources. And any sum chargeable to income-tax under clause (iiia) of section-28 gets included in this scope.
For businesses, this definition influences:
- Interest paid on business loans
- Charges paid to NBFCs, fintech lenders, banks
- Processing fees on working capital loans
- Overdraft or credit line charges"
- Factoring interest
- Bill discounting interest
Basically, if you borrowed money for business, almost every cost tied to that transaction falls under the “interest” umbrella.
Also Read: The Exemption Rule Powering Mutual Funds & UTI
Why This Definition Exists
Simple reason:
Taxpayers used to (and sometimes still try to) rename interest-type expenses to bypass tax rules.
Example?
Instead of calling something interest and facing TDS rules, parties might call it “service fee”.
This section blocks that workaround by stating the substance of the transaction matters, not the label.
Connection With Deductions (Scientific Research Note)
There’s a lesser-known angle. When a business borrows for innovation or R&D, there are provisions elsewhere in the Act that allow deductions while computing taxes for expenses relating to scientific research.
For example:
- The law provides for a deduction of expenses incurred on scientific research and development activities.
- Even expenditure of a capital nature on scientific research qualifies in some cases.
- A provision that allows taxpayers to claim deductions for expenses incurred in scientific research and development ensures innovation isn't penalized.
If the research project is debt-funded, the interest component still sits under Section 2(28) and deduction eligibility kicks in as per R&D-related sections. This is where correct classification gets powerful.
Practical Real-World Scenarios
Let’s break it down.
Scenario 1: Business Loan Processing Fee
Bank charges you a fee.
You call it documentation cost.
For tax? Still interest.
Scenario 2: NBFC Penal Interest
Delayed EMI? Extra interest?
Still taxable or deductible as interest.
Scenario 3: Overdraft Limit Fee
Commitment charge? Renewal fee?
Falls into the interest bucket.
Scenario 4: Business Factoring
Discount charges paid?
Often treated similar to interest nature for tax evaluation.
These are not hair-splitting issues. Get them right and you optimize tax benefits. Misclassify them and you risk disallowances.
Also Read: TDS on Virtual Digital Assets (Crypto, NFTs & More)
Links With Other Sections You Might See Googled
You might come across people researching sections like:
- sukanya samriddhi yojana income tax section (for savings-focused deductions)
- section 86 of income tax act (about share of income from AOPs)
- section 10(46a) of income tax act (specific govt authority exemption)"
- section 15H of income tax act (Form 15H declaration to avoid TDS)
- person definition in income tax section (very crucial for all applicability rules)
Why mention these?
Because tax definitions connect. People researching specific exemption or deduction provisions often end up needing clarity around interest treatment too.
Key Takeaway
Section 2(28) is simple at surface level but extremely powerful in application. If money was borrowed and a fee, charge or payment is linked to that debt, chances are the tax department treats it as interest.
Whether you're a business owner, CFO, startup founder, or tax student, this knowledge shapes correct tax planning and avoids disputes.
Final Thoughts
The Income Tax Act looks complex, but most of it rests on understanding definitions correctly. Section 2(28) quietly influences big decisions around financing, borrowings, and deductions. When you borrow, interest is not just interest. Processing fee, service fee, discounting fee, overdue charge… labels don't matter. Economic reality does. Get this right and tax planning becomes easier. Get it wrong and you risk penalties or disallowances.
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