Interest Expense explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The finance cost note is the mirror image of the funding side of the balance sheet — four heads for four sources, and a fifth for interest that arises without any borrowing at all.
The five heads
As per Note 6 of the General Instructions, disclosure of finance costs is to be bifurcated under:
- Interest on deposits
- Interest on borrowings
- Interest on debt securities
- Interest on subordinated liabilities
- Other interest expense
The finance costs should be classified based on financial liabilities measured at fair value through profit or loss and on financial liabilities measured at amortised cost. The latter should be calculated as per the effective interest method as per Ind AS 107.
Heads (a) to (d) correspond exactly to the four funding lines under financial liabilities — Deposits, Borrowings (Other than Debt Securities), Debt Securities and Subordinated Liabilities.
That correspondence lets a reader compute an effective cost of funds for each source by pairing the expense line with the average balance behind it. For an NBFC, the relative cost of deposits against market borrowings against subordinated debt is central to understanding both margin and funding strategy.
It also explains why interest on subordinated liabilities gets its own head despite typically being the smallest of the four. Subordinated debt is expensive precisely because it ranks last, and the premium over senior funding is information in itself.
What each head contains
| Head | Contents |
|---|---|
| Interest on deposits | Interest paid on all types of deposits including deposits from banks and other institutions. Also unwinding of the discount that results in an increase in financial liabilities such as security deposits for assets taken on lease. |
| Interest on borrowings | Discount / interest on all borrowings and refinance from banks and other institutions and agencies, and interest in respect of lease liabilities recognised in accordance with Ind AS 116. |
| Interest on debt securities | Interest on bonds / debentures and liability component of financial instruments. |
| Interest on subordinated liabilities | Interest expense on all subordinated liabilities. |
Other interest expense
The residual head catches two items that are interest in substance without arising from any borrowing:
- Increases in the carrying amount of provisions / decommissioning liabilities where such increase reflects the passage of time;
- Net interest on net defined benefit liability, which reflects the change in net defined benefit liability that arises from the passage of time.
Both are unwinding of a discount. A provision measured at present value grows toward its settlement amount as time passes, and that growth is a financing cost rather than an operating one. The same is true of a defined benefit obligation.
The parallel with the income side is exact: interest income on unwinding of security deposits sits in other interest income for the same reason.
The measurement split
The requirement to classify finance costs between liabilities at FVTPL and those at amortised cost matters because only the second produces an effective interest figure. For a liability measured at FVTPL, the coupon and the fair value movement may be presented together, and the entity's stated policy governs.
For amortised cost liabilities the effective interest method spreads issue costs, discounts and premiums over the life of the instrument, giving a cost of funds that is comparable across issuers and across periods.
Common mistakes
- Presenting lease liability interest outside finance costs.
- Treating provision unwinding as an operating expense.
- Combining subordinated liability interest with other borrowings.
- Omitting the split between amortised cost and FVTPL liabilities.
Key Facts About Interest Expense
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
How are finance costs classified?
As interest on deposits; interest on borrowings; interest on debt securities; interest on subordinated liabilities; and other interest expense.
What further split is required?
Finance costs should be classified based on financial liabilities measured at fair value through profit or loss and on financial liabilities measured at amortised cost, the latter calculated as per the effective interest method as per Ind AS 107.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Interest Expense: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.