Rule 42 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.
Rule 42 of the Income-tax Rules, 2026 lists the categories of bad or doubtful debt on which section 56 applies — one set for banks and financial institutions, another for housing finance public companies.
The two populations rule 42 covers
| Sub-rule | Applies to |
|---|---|
| (1) | Every public financial institution, scheduled bank, State Financial Corporation and State Industrial Investment Corporation, where its income from interest relates to the listed categories |
| (2) | Every public company as defined in sub-rule (3)(c), where its income by way of interest pertains to the listed category |
The 1962 parallel is rule 6EA. Sub-rule (3)(c) confines the public company limb to a company that is a public company under section 2(71) of the Companies Act, 2013, whose main object is carrying on the business of providing long-term finance for construction or purchase of a house in India for residential purposes, and which is registered under section 29A of the National Housing Bank Act, 1987 or in accordance with the Housing Finance Companies (NHB) Directions, 1989 or the Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021.
Rule 42, sub-rule (1)(a) — categories in relation to a loan or advance
- Interest or instalment of principal overdue for more than one hundred and eighty days.
- The account remains out of order in respect of an overdraft or cash credit.
- The bill remains overdue for more than one hundred and eighty days in the case of bills purchased and discounted.
- Instalment of principal or interest overdue for two crop seasons for short duration crops.
- Instalment of principal or interest overdue for one crop season for long duration crops.
- Liquidity facility outstanding for more than one hundred and eighty days for a securitisation transaction under the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021.
- In derivative transactions, overdue receivables representing positive mark-to-market value of a derivative contract, unpaid for one hundred and eighty days from the specified due date.
Rule 42, sub-rule (1)(b) — categories in relation to an account
- A working capital borrowal account with irregular drawings for a continuous period of one hundred and eighty days, even though the unit may be working or the borrower's financial position is satisfactory — and for this purpose the outstanding based on drawing power calculated from stock statements older than six months is deemed irregular.
- Regular or ad hoc credit limits not reviewed or renewed within one hundred and eighty days from the due date or the date of ad hoc sanction.
- Erosion in the value of security where the realisable value is less than 50% of the value assessed by the bank or accepted by the Reserve Bank of India at the time of last inspection.
- The realisable value of the security, as assessed by the bank, approved valuers or the RBI, is less than 10% of the outstanding in the borrowal accounts.
Category (b)(i) says so expressly — irregular drawings for 180 days count "even though the unit may be working or the borrower's financial position is satisfactory". So do the two security-value tests at (b)(iii) and (b)(iv), which look only at collateral, and the unreviewed limit test at (b)(ii), which is about the lender's own process. Rule 42 is not a test of whether the borrower is in trouble; it is a list of conditions.
Sub-rule (3)(a) defines "out of order" for an overdraft or cash credit account:
- the outstanding balance remains continuously in excess of the sanctioned limit or drawing power for one hundred and eighty days; or
- the outstanding is below the limit or drawing power but there are no credits continuously for one hundred and eighty days, or the credits are not enough to cover the interest debited during the previous one hundred and eighty days.
Sub-rule (2) — doubtful and loss assets of a housing finance company
The category is a doubtful asset: a debt which has remained a non-performing asset of the specified nature for a period exceeding two years. The non-performing asset descriptions run to nine items:
| Item | Description |
|---|---|
| (A) | An asset on which interest has remained overdue for more than 180 days |
| (B) | A term loan — other than one to an agriculturist or a person dependent on the harvest of crops — inclusive of unpaid interest, where the instalment or the interest is overdue for more than 180 days |
| (C) | A demand or call loan overdue for more than 180 days from the date of demand, or on which interest is overdue for more than 180 days |
| (D) | A bill overdue for more than 180 days |
| (E) | Interest on a debt, or income on receivables under "other current assets" in the nature of short-term loans or advances, overdue for more than 180 days |
| (F) | Dues on sale of assets, services rendered or reimbursement of expenses, overdue for more than 180 days |
| (G) | Lease rental and hire purchase instalment overdue for more than 180 days |
| (H) | A term loan to an agriculturist or a person dependent on the harvest of crops, unpaid for two crop seasons beyond the due date for short duration crops, or one crop season for long duration crops |
| (I) | The balance outstanding under all credit facilities (including accrued interest) made available to the same borrower or beneficiary when any of them becomes a non-performing asset |
The second category is a loss asset: an asset identified as a loss asset and considered uncollectible but not written off by the assessee.
Once any facility to a borrower becomes non-performing, item (I) draws in the balance outstanding under every other credit facility to the same borrower or beneficiary, including accrued interest. So the classification under rule 42 is applied borrower-wise, not facility-wise, and a single overdue bill can move a whole relationship.
The crop definitions in rule 42
- "Long duration crop" means a crop with a crop season longer than one year.
- "Short duration crop" means a crop which is not a long duration crop.
- "The crop season for each crop" means the period up to harvesting of the crops raised, as determined by the State Level Bankers' Committee in each State.
The crop season is therefore a state-specific fact, not a national one — two identical loans in different states can cross the threshold on different dates.
Worked example
| Facts | Position under rule 42 |
|---|---|
| Scheduled bank; term loan interest overdue 200 days | Within sub-rule (1)(a)(i) |
| Cash credit account within limit but with no credits for 190 days | Out of order — sub-rule (3)(a)(ii) |
| Working capital account drawing on stock statements eight months old | Outstanding deemed irregular; 180-day clock applies |
| Ad hoc limit sanctioned and never reviewed for seven months | Within sub-rule (1)(b)(ii) |
| Security realisable at 45% of the last RBI-accepted value | Within sub-rule (1)(b)(iii) |
| Positive mark-to-market on a derivative unpaid for 185 days | Within sub-rule (1)(a)(vii) |
| Housing finance company; loan NPA for 26 months | Doubtful asset — more than two years |
| Same borrower's second housing loan, currently regular | Drawn in by item (I) |
Compliance checklist
- Identify which limb of rule 42 applies — the institution list or the housing finance public company definition.
- Run the 180-day test across interest, principal, bills, liquidity facilities and derivative receivables.
- Apply the "out of order" definition to every overdraft and cash credit account.
- Treat drawings on stock statements older than six months as irregular.
- Check limit review and renewal dates independently of borrower conduct.
- Test security erosion at the 50% and 10% thresholds.
- Use the State Level Bankers' Committee crop season for agricultural accounts.
- For a housing finance company, apply the two-year doubtful asset test and the borrower-level rule at item (I).
- Include loss assets not yet written off.
Common mistakes
- Excluding a performing borrower whose account is technically irregular.
- Ignoring the security-value tests because repayments are current.
- Applying a uniform crop season across states.
- Classifying facility-wise and missing item (I).
- Omitting loss assets because they have not been written off.