The Interest-tax Act, 1974
The Interest-tax Act, 1974
Objective:
The Act was enacted to impose a special tax on interest income of certain categories of banks and financial institutions. Its purpose was to regulate and generate revenue from interest earnings of financial bodies and thereby strengthen government resources.
Key Provisions:
Levy of Tax:
Tax is levied on the chargeable interest of scheduled banks, financial institutions, and certain credit institutions.
“Chargeable Interest” means the total interest earned on loans and advances, after excluding specified exemptions.
Charge of Tax:
Initially, the rate of interest-tax was 7%, later amended from time to time.
Applicable only on interest income and not on other sources of income (like dividends, capital gains, etc.).
Scope:
Applied to scheduled banks and financial institutions operating in India.
Non-banking institutions were not covered unless notified.
Administration:
The Act was administered by the Income-tax Department.
Returns, assessments, and appeals were governed by similar provisions as under the Income-tax Act.
Exemptions:
Interest earned on certain government securities, inter-bank loans, and specified categories of lending were exempted.
Repeal:
The Act was eventually abolished w.e.f. 1st April, 2000, because it was seen as a discouragement to lending and investment activities.
Importance of the Act:
Helped the government earn revenue from the financial sector’s interest income.
Was a tool for controlling credit expansion in the economy.
Its repeal encouraged growth of lending and banking activities.
📑 Summary Table
| Aspect | Details |
|---|---|
| Name of Act | The Interest-tax Act, 1974 |
| Objective | To levy tax on interest income of banks & financial institutions |
| Levy | Tax on “chargeable interest” (interest on loans/advances) |
| Rate of Tax | Initially 7% (amended later) |
| Applicability | Scheduled banks & notified financial institutions |
| Exemptions | Govt. securities, inter-bank loans, certain specified lending |
| Administration | By Income-tax Department (returns, assessments, appeals) |
| Repeal | Abolished from 1st April, 2000 |
| Importance | Controlled credit, generated govt. revenue, later repealed to boost banking sector |
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