Introduction
Are you looking to understand about Demystifying Section 43D of Income Tax Act 1961: Special Provision for Public Financial Institutions and Companies ?
This detailed article will tell you all about Demystifying Section 43D of Income Tax Act 1961: Special Provision for Public Financial Institutions and Companies.
Hi, my name is Shruti Goyal, I have been working in the field of Income Tax since 2011. I have a vast experience of filing income tax returns, accounting, tax advisory, tax consultancy, income tax provisions and tax planning.
Taxation can be a complex topic, and it becomes even more challenging when it comes to public financial institutions and companies. Section 43D of the Income Tax Act 1961 is one such provision that can be difficult to comprehend. It is essential to understand this section as it has a significant impact on the taxation of these entities.
In this blog, we will delve deeper into the special provision in case of income of public financial institutions, public companies, etc section 43D of Income Tax Act 1961. We will explain the provision, its implications, and its benefits for public financial institutions and companies.
Understanding Section 43D of Income Tax Act 1961
Section 43D of the Income Tax Act 1961 was introduced in 2001 and applies to public financial institutions and companies. It provides a special provision for the computation of income for tax purposes. Let’s understand this provision in detail.
What is Section 43D of Income Tax Act 1961?
Section 43D provides that interest income earned by public financial institutions and companies, such as banks and insurance companies, would be taxed on a receipt basis. This means that the interest income earned by these entities would be taxed only when it is received or credited to their account, whichever is earlier.
What is the impact of Section 43D on Taxation?
Before the introduction of Section 43D, interest income earned by public financial institutions and companies was taxed on an accrual basis. This meant that the interest income was taxed in the year it was earned, irrespective of whether it was actually received or not.
With the introduction of Section 43D, public financial institutions and companies have the benefit of postponing the payment of taxes until the interest income is received. This provides them with better liquidity and cash flow management.
What are the benefits of Section 43D for Public Financial Institutions and Companies?
The benefits of Section 43D for public financial institutions and companies are as follows:
Improved cash flow management: Section 43D allows public financial institutions and companies to postpone the payment of taxes until the interest income is received. This helps in better cash flow management, as they can use the funds for other purposes until the tax liability arises.
Better liquidity: By deferring the tax payment, public financial institutions and companies can retain a larger amount of funds, which improves their liquidity position.
Reduction in tax liability: Section 43D reduces the tax liability of public financial institutions and companies as they are not required to pay taxes on interest income that has not been received.
FAQs
Q. Who does Section 43D apply to?
A. Section 43D applies to public financial institutions and companies, such as banks and insurance companies.
Q. What is the benefit of Section 43D for public financial institutions and companies?
A. Section 43D provides better cash flow management, improved liquidity, and a reduction in tax liability for public financial institutions and companies.
Q. When was Section 43D introduced?
A. Section 43D was introduced in 2001.
Conclusion
Section 43D of the Income Tax Act 1961 is a crucial provision that provides a special provision for public financial institutions and companies. The provision allows them to defer the payment of taxes on interest income until it is received. This provides them with better
liquidity, cash flow management, and a reduction in tax liability.
Understanding Section 43D is important for public financial institutions and companies as it affects their taxation. By using this provision, they can improve their financial position and have better control over their cash flow.
In conclusion, Section 43D of the Income Tax Act 1961 is a special provision that provides significant benefits to public financial institutions and companies. It allows them to defer tax payments until interest income is received, which improves their liquidity, cash flow management, and reduces their tax liability. As a public financial institution or company, it is crucial to understand this provision and use it to your advantage.
Section 43D, of Income Tax Act, 1961
Section 43D, of Income Tax Act, 1961 states that
Notwithstanding anything to the contrary contained in any other provision of this Act,—
(a) in the case of a public financial institution or a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or a State financial corporation or a State industrial investment corporation or a deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed10 having regard to the guidelines issued by the Reserve Bank of India in relation to such debts;
(b) in the case of a public company, the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed11 having regard to the guidelines issued by the National Housing Bank in relation to such debts,
shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank or the State financial corporation or the State industrial investment corporation or a deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company or the public company to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation or company, whichever is earlier.
Explanation.—For the purposes of this section,—
(a) “National Housing Bank” means the National Housing Bank established under section 3 of the National Housing Bank Act, 1987 (53 of 1987);
(b) “public company” means a company,—
(i) which is a public company within the meaning of section 312 of the Companies Act, 1956 (1 of 1956);
(ii) whose main object is carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; and
(iii) which is registered in accordance with the Housing Finance Companies (NHB) Directions, 1989 given under section 30 and section 31 of the National Housing Bank Act, 1987 (53 of 1987);
(c) “public financial institution” shall have the meaning assigned to it in section 4A13 of the Companies Act, 1956 (1 of 1956);
(d) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36;
(e) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);
(f) “State industrial investment corporation” means a Government company within the meaning of section 61714 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects;
(g) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;
(h) the expressions “deposit taking non-banking financial company”, “non-banking financial company” and “systemically important non-deposit taking non-banking financial company” shall have the meanings respectively assigned to them in clauses (e), (f) and (g) of Explanation 4 to section 43B.