Unpaid interest of Rs 45,00,000 due to a State Financial Corporation and a bank was converted into fresh loans repayable in 60 instalments. During the year, instalments aggregating Rs 2,75,000 were paid. The deduction allowable under section 43B is:

1. Interest on loans from public financial institutions, State Financial Corporations and scheduled banks is deductible under section 43B only on actual payment. 2. Explanations 3C and 3D declare that CONVERSION of such interest into a loan or borrowing is NOT actual payment. 3. The converted interest is deductible only as and when the instalments of the new loan are actually paid. 4. Instalments paid during the year = Rs 2,75,000, so the deduction is limited to that amount. 5. The claim of the full Rs 45,00,000 on conversion is exactly what Circular No. 7/2006 rejects; option D deducts the unpaid balance of the loan rather than the instalments genuinely paid. _Source: ICAI CA Inter P3(A) Income-tax SM (May 2026), Ch 3 Unit 3 PGBP, PDF p. 100_