Start with the interest already in the accounts
When section 198 net profit is computed for section 197 managerial remuneration, section 198(4)(f)–(h) requires deductions for debenture interest, interest on qualifying mortgages or charge-secured loans and advances, and interest on unsecured loans and advances. If qualifying interest already reduced the book profit used as the starting point, leave that deduction in place or add it back and re-deduct it once in a gross bridge. If the starting profit already reflects the interest, deducting it again without an add-back would count the expense twice.
Read the applicable text: Companies Act, 2013: section 198(1) and (4)(f)–(h) India Code: consolidated Companies Act text.
Work from instruments rather than finance-cost labels
Under clause (f) identify debentures issued by the company; do not move a debenture coupon into clause (g) just because the instrument carries a charge. Clause (g) covers mortgages executed by the company and loans and advances secured by a charge on its fixed or floating assets. For clause (h), establish that the amount is interest on an unsecured loan or advance. Where the loan depends on third-party support, inspect the actual security terms before selecting a clause.
Reconcile the whole line before adjusting it
Break finance costs into contractual interest, other financing costs, capitalised amounts, reversals and accounting measurement effects. Amounts shown together in the ledger may not share statutory treatment. Retain a separate technical conclusion for items such as arrangement fees, effective-interest adjustments and borrowing costs capitalised into an asset. Do not assume the entire accounting caption is interest under these clauses or deduct a capitalised amount solely because a lender charged it.
Tie each amount to a single deduction
Assign one instrument ID and period to each line. Bridge opening accrual, period interest, payments and closing accrual. Trace the part already expensed into the trial balance. Distinguish payment of a prior accrual, redemption of principal and current interest. If the starting point is an operating result before interest, make the supported deduction once; if starting after interest, adjust only actual differences.
Keep the remuneration result and other tax computations separate
Section 198(1) ties this statutory computation to section 197. For a company to which section 197 applies, verify the applicable remuneration rule, approvals and any Schedule V position on a separate sheet. The interest bridge covers one component of the statutory net profit, not the final section 198 adjustments, a corporate income-tax interest deduction or a statement-of-profit-and-loss classification decision.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Retain an existing deduction
Book profit is ₹500 lakh after ₹24 lakh debenture interest, ₹18 lakh charge-secured loan interest and ₹8 lakh unsecured borrowing interest. Total qualifying interest is ₹50 lakh. Add-back followed by re-deduction gives ₹550 lakh less ₹50 lakh, or ₹500 lakh before unrelated statutory adjustments.
Illustrative example 2: Start before interest instead
The workpaper starts at ₹360 lakh before qualifying interest of ₹22 lakh on debentures and ₹13 lakh on an unsecured borrowing. Deduct ₹35 lakh once. The result before other adjustments is ₹325 lakh.
Illustrative example 3: Keep a secured debenture in one row
A secured debenture has a coupon cost of ₹17 lakh. A separate mortgage loan costs ₹9 lakh. Using clauses (f) and (g) once each gives ₹26 lakh, not the ₹43 lakh that would result from adding the debenture to the mortgage bucket as well.
Illustrative example 4: Separate the closing accrual
Opening interest payable is ₹3 lakh, period interest is ₹12 lakh and interest paid is ₹10 lakh. The closing payable is ₹5 lakh. The period expense check uses ₹12 lakh, rather than the ₹10 lakh cash outflow.
Illustrative example 5: Hold the capitalised part for separate analysis
A borrowing schedule shows ₹30 lakh in total interest, with ₹19 lakh expensed and ₹11 lakh capitalised. The amount already reflected in book profit is ₹19 lakh. The remaining ₹11 lakh requires a separate statutory analysis; the reconciliation does not decide it.
Illustrative example 6: Find an unexplained finance-cost difference
Finance costs total ₹68 lakh. Three supported interest categories total ₹29 lakh, ₹16 lakh and ₹7 lakh, or ₹52 lakh. Analyse the remaining ₹16 lakh by nature before assigning any statutory treatment.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm why section 198 is being applied | Section 197 remuneration workpaper |
| 2 | Record the book-profit starting point | Signed accounts and trial balance |
| 3 | List borrowing instruments individually | Loan agreements and debenture terms |
| 4 | Identify mortgage or charge basis | Security documents and charge record |
| 5 | Allocate each qualifying interest item once | Clauses (f), (g) and (h) mapping |
| 6 | Reconcile interest accrual movements | Opening balance, expense, cash and closing balance |
| 7 | Identify amounts already deducted in books | Profit and loss ledger tie |
| 8 | Isolate amounts not expensed or not clearly interest | Capitalisation and fee workpapers |
| 9 | Reperform the net adjustment | Gross and net bridges yielding the same result |
| 10 | Complete the remuneration review separately | Final statutory adjustments and approval evidence |
Sixteen practitioner FAQs
1. Does section 198 deduct all finance costs as one number?
No. Identify qualifying interest under the relevant clause and analyse the remaining costs.
2. Where is interest on a secured debenture classified?
Identify it as debenture interest under clause (f) and count it once.
3. Is every bank borrowing automatically a clause (g) loan?
No. Check the mortgage or qualifying charge under the actual documents.
4. Does a guarantee alone establish a charge on company assets?
No. Review the security documents for a mortgage or charge separately.
5. Where does unsecured loan interest go?
Clause (h) covers interest on unsecured loans and advances.
6. Is a loan instalment all interest?
No. Split principal, interest and any separate charge.
7. Can a cash payment settle last year's accrual?
Yes. Reconcile the payment to the liability and distinguish the current-year expense.
8. What if book profit already includes the interest cost?
Do not deduct it again without a corresponding add-back in a gross bridge.
9. Can an effective-interest adjustment be copied from the ledger?
Reconcile it to contractual interest and determine its statutory treatment separately.
10. How should a capitalised borrowing cost be handled?
Identify it outside the already expensed amount and document its separate treatment.
11. Does loan refinancing require a new bridge?
Yes. Split costs and accruals by old and new instruments to prevent overlap.
12. Does the lender's annual statement settle the computation?
It supports the reconciliation; test dates, amount, accounting and statutory classification separately.
13. Can income-tax interest disallowance be copied into section 198?
No. The section 198 purpose and statutory tests are separate.
14. Should a prior-period reversal be netted without explanation?
No. Identify the original amount and period so the movement can be reviewed.
15. Does the interest bridge set the final remuneration ceiling?
No. Complete the remaining statutory profit and section 197 calculations.
16. What should the reviewer be able to reproduce?
The interest classification, the P&L tie and a single net adjustment for each instrument.
Official sources
Companies Act, 2013: section 198(1) and (4)(f)–(h) India Code: consolidated Companies Act text