Section 24(b): Processing Fee, Insurance and Maintenance Charges Can Also Qualify as “Interest”

 

 

When a taxpayer borrows money to acquire a property and pays the bank not merely interest but also processing fees, insurance and other borrowing-related charges, can the entire amount qualify for deduction under section 24(b) of the Income-tax Act?

A recent decision of the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has given an interesting answer: yes, where such charges have a direct nexus with the borrowing.

The ruling in Mukul Rohatgi v. ACIT, ITA No. 3070/Del/2026 brings into focus an important but often overlooked aspect of the law—the meaning of the word “interest” for income-tax purposes.

The Property and the Loan

The assessee had acquired a commercial property at Noida for approximately Rs. 58.30 crore. The property was let out and generated monthly rental income of around Rs. 47.39 lakh.

The acquisition was funded through an overdraft facility of approximately Rs. 60.50 crore from the bank.

During the year, the bank charged the assessee a total amount of around Rs. 1.19 crore in connection with the facility. Out of this:

Rs. 72.25 lakh was shown as interest;

the balance of approximately Rs. 44.77 lakh comprised processing fee, protection insurance and annual maintenance charges.

The assessee claimed the entire amount as interest eligible for deduction under section 24(b).

The Assessing Officer, however, took a narrower view.

AO: Interest Means Interest Only!

According to the Assessing Officer, section 24(b) permits deduction of interest payable on borrowed capital. Therefore, only the amount specifically described as “interest” by the bank could be allowed.

Accordingly, the AO allowed the deduction of Rs. 72.25 lakh but disallowed the balance Rs. 44.77 lakh representing processing fee, insurance and annual maintenance charges.

The Commissioner (Appeals) agreed with the Assessing Officer.

The matter therefore reached the ITAT.

The Important Question Before the Tribunal

The dispute was not really about whether the assessee had paid the amounts.

The more important question was:

What does the Income-tax Act actually mean by the word “interest”?

And this is where section 2(28A) becomes extremely important.

Section 2(28A) defines “interest” in an inclusive manner. It covers interest payable in any manner in respect of monies borrowed or debt incurred and specifically includes certain service fees or other charges in respect of the monies borrowed or debt incurred.

Therefore, the word “interest” under the Income-tax Act is considerably wider than the ordinary meaning of interest used in everyday banking language.

Definition Cannot Be Ignored

The Tribunal observed, in substance, that the definition contained in section 2(28A) cannot be ignored while interpreting section 24(b).

Section 24(b) provides deduction for interest payable on capital borrowed for acquisition, construction, repair, renewal or reconstruction of the property.

But when the Act itself gives an expanded definition of “interest”, the expression cannot simply be restricted to the amount appearing under the heading “Interest” in a bank statement or certificate.

The Tribunal noted that section 2(28A) expressly includes a service fee or other charge in respect of the monies borrowed or debt incurred.

Interestingly, the definition can extend even to a situation where a borrowing facility is made available but is not actually utilised, provided the statutory conditions are otherwise satisfied.

Nexus With Borrowing Is the Key

The important principle emerging from the decision is not that every bank charge automatically becomes deductible interest.

The crucial test is the nexus with the borrowing.

In the present case, the processing fee, protection insurance and annual maintenance charges were connected with the overdraft/loan facility.

The Revenue did not establish that the payments were unrelated to the borrowing. There was also no allegation that the arrangement was a colourable device adopted for obtaining an artificial tax benefit.

The Tribunal therefore held that the charges were covered within the wider meaning of “interest” under section 2(28A).

The disallowance of Rs. 44.77 lakh was accordingly deleted.

The Tribunal also followed the earlier decision in Peepul Tree Properties Private Limited, which had dealt with the scope of “interest” under section 2(28A).

What Does This Mean for Property Owners?

This decision can be particularly relevant for taxpayers who have borrowed substantial funds for acquiring properties which are subsequently let out.

Suppose a taxpayer obtains a large loan for purchasing a commercial property.

The bank may charge:

Interest + Processing Fee + Loan-related Service Charges + Other Borrowing Charges

The taxpayer should not mechanically assume that only the amount described as “interest” in the bank certificate can qualify under section 24(b).

The nature of each charge needs to be examined.

If a particular charge has a direct and demonstrable nexus with the borrowing, there may be a strong case for treating it as “interest” for the purposes of the Income-tax Act, subject to the other conditions of section 24(b).

A Word of Caution

This does not mean that every expenditure incurred in relation to a property loan can be claimed as interest.

For example, an expense merely incurred because the assessee owns a property, or an independent expenditure having no connection with the borrowing, cannot automatically be brought within section 2(28A).

The taxpayer should establish:

What is the nature of the charge?

Who has levied the charge?

Is it connected with the borrowing facility?

Is there documentary evidence establishing the nexus?

Does the expenditure otherwise satisfy the requirements of section 24(b)?

Proper documentation therefore becomes extremely important.

Look Beyond the Bank Certificate

The larger lesson from Mukul Rohatgi is that taxation cannot always be decided merely by the nomenclature used in a bank statement.

A bank may classify a payment as “processing charges”, “service fee”, “maintenance charges” or another description for its commercial and accounting purposes.

But the Income-tax Act has its own statutory definition.

Where Parliament has deliberately given an inclusive definition to a term, the definition has to be given effect to while interpreting the charging or deduction provision.

Thus, for section 24(b), the enquiry should not end merely because an amount is not labelled “interest”.

The real question is:

Is the charge in substance and in law connected with the money borrowed or debt incurred?

If the answer is yes, the claim deserves examination under the wider definition of “interest” contained in section 2(28A).

The TAX Take

The Mukul Rohatgi ruling provides an important reminder for taxpayers having property loans.

“Interest” under the Income-tax Act is not necessarily limited to the amount appearing under the heading “Interest” in the bank certificate.

Where processing fees or other charges are intrinsically connected with the borrowing, section 2(28A) may bring them within the definition of “interest”, making them potentially eligible for deduction under section 24(b), subject to fulfilment of the other statutory conditions.

So, the next time your bank certificate shows ₹72 lakh as interest and another ₹45 lakh as “charges”, don’t simply ignore the second figure.

The bank may call it a charge. The Income-tax Act may call it “interest”.

The views expressed above are based on the judicial principle emerging from the cited decision and should be applied after examining the nature and documentation of the particular borrowing and charges.

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The copy of the order is as under:

ITA No.3070-Del-2026