Interest can have several meanings; for instance, per the Transfer of Property Act, 1872, interest means having ownership or right in a property for doing something. Interest can also mean the portion of a stockholder’s stake in a corporation. Interest can also be money or a fee paid for having access to the borrowing of an amount.
Under this Interest Act, the Interest is money paid as compensation along with debt recovery. Interest can also be a form of reimbursement for the person who has endured the money loss that rightfully belongs to him/her.
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The Interest Act, 1978
The Interest Act was enacted on 31 March 1978 to codify and modify the law governing interest payment in specific circumstances. The Act applies to the whole of India. The Interest Act of 1978 repealed the previous Act of 1839.
The Interest Act aspires to increase the level of liberalism in the law governing the issuance of Interest. Under Section 2(a) of the Interest Act 1978, the court comprises the tribunal and arbitrator.
Interest is any profit beyond the amount initially lent in the first transaction. This profit can be collected directly or repaid in any other way. However, the Interest Act collects the profit by charging interest. As per Section 5 of the Interest Act, 1978, the Act does not affect anything given under Section 34 of the Civil Procedure Code,1908.
The Power of Court to Allow Interest
Section 3 of the Interest Act, 1978 provides the instances when the court can allow Interest. The instances include the following:
When a person institutes a proceeding for the recovery of any debt or damage, or the proceeding is related to the Interest on such debt or damage, the court can grant Interest to the rightful recipient as per the current interest rate.
This interest rate granted can be allowed for a given time frame and includes the following:
- If there is a written agreement between the parties and such debt is to be paid by a specific deadline, the interest can be granted from the due date of the debt to the date when the legal proceeding is initiated.
- If there is no predetermined date, the interest can be awarded from the date mentioned in a written notice (provided by the entitled person or the claimant to the liable party) stating the intention to claim interest. This period would extend until the commencement of the legal proceedings.
Per the provision of the statute, if the debt or damages are repaid before the initiation of the proceedings, no interest will be allowed.
The court can grant Interest in any such proceedings mentioned under Section 3(1), which includes the following:
- The court passes a judgement, order, or award for an amount that is more than Rs. 4000.
- The awarded sum includes compensation for personal injuries sustained by the plaintiff or another individual or compensation linked to the death of a person.
The granted interest should apply for the entire period or a part of it, starting from the date mentioned in the notice and extending to the initiation of the proceedings.
The court can decide not to grant Interest for these damages if it is convinced there is a specific reason justifying the exclusion of Interest concerning those particular damages.
Exceptions to Section 3 of the Interest Act
Section 3 will not apply to the following:
- To any debt or damage on which Interest is already determined to be made payable under any agreement
- To any payment of Interest which is barred under any agreement
- To any recoverable compensation under the Negotiable Instruments Act, 1882 for specific instruments.
- To the provisions under Civil Procedure Code,1908 on Order 2 Rule 2.
- To the Interest given by a court on another interest.
Interest Payable Under Law
As per Section 4 of the Interest Act, 1978, if the Interest is to be paid under enactment of law or usage, it is payable as per the said Act.
In this case, Dushyant N. Dalal v. Securities and Exchange Board of India, AIR 2018 SC 447, the phrase ‘or other rule of law’ in Section 4(1) applies to Interest given under equity. The Interest is awarded from the date the cause of action arises to when proceedings are instituted to recover such Interest.
Section 4(2) of the Interest Act provides the situation when the Interest will not be allowed and includes the following:
- When cash or another item has been kept as security for the fulfilment of a legal or contractual duty imposed by law from the day the payment was made;
- When a duty to pay funds or recover any property is made due to a fiduciary relationship;
- When money or other property is acquired or kept through fraud from the beginning of the cause of action.
- When the claim is for dower or maintenance on the date of the cause of action arises.
The court awards Interest for the loss suffered by an individual when the wrongdoer has kept the funds or the amount. Interest is a payment to put the innocent parties in their initial positions.
The repayment on a loan or other financial obligation is called Interest. The variation between the money liability arising on the date of payment to the date of commencement of proceedings for the recovery of the same money is viewed as a profit.
The Interest Act helps ascertain the rules to determine the Interest payable in certain circumstances. The Sections under the Interest Act focus on the rate of Interest that is chargeable on the money collected during the pendency of litigation and after the litigation.
Why is interest charged?
The Interest is charged on the cost of receiving cash and the expenses related to lending and borrowing money. Under the Interest Act, the Interest is charged to claim compensation for any damage or debt recovery.
What is an interest?
Interest is the amount on which the money is lent. Under the Interest Act of 1978, interest is a sort of compensation.
Which act in India governs the award of Interest?
The Interest Act of 1978 governs the award of Interest for a debt owed in form and responsibility for an amount of money that has been determined.
What is the benefit of Interest?
The Interest aids a person to seek damages for being denied the use of rightfully due money. Along with the Interest Act, Interest has its benefits under other enactments, which help to claim the same amount as compensation.