Supreme Court Clarifies Section 36(1)(viii): No Deduction for Bank Deposit Interest
Apex Court Restricts Deduction to Income from Long-Term Finance
Ruling Impacts Statutory Corporations and Financial Institutions
By Our Legal Reporter
New Delhi: December 12, 2025:
In a landmark judgment, the Supreme Court of India has held that interest earned from bank deposits, dividends, or service charges cannot be claimed as deductible income under Section 36(1)(viii) of the Income-tax Act, 1961. The ruling came in the case involving the National Cooperative Development Corporation (NCDC), which had sought to claim a 40% deduction on such income.
Also Read: Skills Young Lawyers Need for Banking, Finance, and Insolvency Law Careers
The Court’s decision narrows the scope of the deduction, making it clear that only profits directly derived from the business of providing long-term finance qualify.
Background of Section 36(1)(viii)
Section 36(1)(viii) was introduced to encourage statutory corporations and financial institutions to provide long-term finance for industrial, agricultural, and infrastructure development. It allows a 40% deduction of profits derived from long-term finance, defined as loans repayable over a period of not less than five years.
Over time, corporations began claiming deductions on other forms of income, such as interest from deposits or dividends, arguing that these were incidental to their financing activities.
Supreme Court’s Ruling
A bench of Justice P.S. Narasimha and Justice Atul S. Chandurkar dismissed NCDC’s appeal, holding that:
- Only first-degree profits from long-term finance qualify for deduction.
- Income from bank deposits, dividends, or service charges is not directly derived from long-term finance.
- Section 36(1)(viii) is a specific incentive provision, not a general exemption for all income earned by financial corporations.
The Court emphasised that the legislative intent was to promote long-term financing, not to subsidise unrelated income streams.
Key Precedents and Judicial Reasoning
The Court relied on earlier rulings, including:
- HDFC Ltd. v. CIT – clarified that deduction applies only to income directly linked to long-term finance.
- Bombay High Court in Kanak Impex – reiterated that incidental income cannot be treated as derived from core financing activities.
By aligning with these precedents, the Supreme Court reinforced a strict interpretation of Section 36(1)(viii).
Also Read: Gurugram 42,000 foreign liquor bottles Racket Bust Highlights India’s Strict Excise Laws
Implications of the Judgment
For Statutory Corporations
- Corporations like NCDC, NABARD, and other development finance institutions must segregate income streams.
- Only profits from loans with repayment periods of five years or more qualify for deduction.
- Interest from deposits or dividends will now be fully taxable.
For Tax Authorities
- The ruling strengthens the Revenue’s position in disallowing deductions claimed on incidental income.
- It reduces scope for litigation by clarifying the boundaries of Section 36(1)(viii).
For Businesses
- Financial institutions must maintain clear documentation to prove that income is derived from long-term finance.
- Tax planning strategies relying on incidental income deductions will need to be revised.
Also Read: Allahabad High Court Rules GST Notices Cannot Be Deemed Served Only by Portal Upload
Expert Views
Tax experts note that the ruling is consistent with the principle that deductions must be strictly construed. Incentive provisions cannot be extended beyond their intended scope. While corporations may face higher tax liabilities, the judgment ensures that the benefit of Section 36(1)(viii) is preserved for its original purpose—promoting long-term financing for development.
Conclusion
The Supreme Court’s ruling marks a significant clarification in tax law. By holding that interest from bank deposits does not qualify for deduction under Section 36(1)(viii), the Court has reinforced the principle that only income directly derived from long-term finance is eligible.
This decision impacts statutory corporations, financial institutions, and businesses relying on such deductions, while strengthening the Revenue’s ability to curb misuse. Going forward, corporations must carefully structure their income streams and ensure compliance with the strict interpretation of Section 36(1)(viii).
GEO Keywords for Faster Searches
- Supreme Court Section 36(1)(viii) ruling India
- Interest from bank deposits tax deduction India
- NCDC Supreme Court case Section 36(1)(viii)
- Long-term finance tax deduction India
- Supreme Court income tax deduction ruling 2025
- Section 36(1)(viii) Income-tax Act explained
- Deduction for statutory corporations long-term finance
- Supreme Court ruling on dividend and deposit interest
- Tax deduction restricted to long-term loans India
- Income derived from long-term finance Supreme Court
Also Read: SEBI’s Investor Protection Guidelines Amid India’s ₹148 Trillion Wealth Boom