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NPA interest reversal calculator FY 2026-27

When an account turns NPA, the bank stops booking interest and gives back what it booked but never collected — the rule for FY 2025-26 and FY 2026-27 bank audits under RBI’s 2025 Directions. Enter the unrealised interest and fees sitting in income, anything applied after the NPA date and any cash since recovered — get the amount to reverse, what may still be taken to income on realisation, and the interest to carry in the memorandum account.

The account on the day it became NPA
Is this an advance against term deposits, NSCs, KVPs or life insurance policies with adequate margin?
Interest on these may be taken to income on the due date — no reversal arises while the margin holds
Interest credited to income this financial year, not realised (₹)
Interest debited to the account or accrued up to the NPA date and taken to income, but not paid by the borrower.
Interest credited to income in earlier years, still not realised (₹)
The reversal reaches back into past periods — it is not limited to the current year.
Of the above, capitalised interest of a sanctioned moratorium (₹)
Where the loan carried a moratorium on interest and turned NPA after the moratorium ended, the capitalised interest of that period need not be reversed.
Fees, commission and similar income accrued, uncollected (₹)
Processing, inspection, guarantee commission and the like booked to income but not recovered.
Interest applied and taken to income after the NPA date (₹)
Where the account was flagged late, the system may have gone on booking interest. All of it comes out.
Interest realised in cash after the NPA date (₹)
Recoveries appropriated to interest under the loan agreement and the bank’s policy.
Did that recovery come out of a fresh or additional facility sanctioned to the borrower?
Interest paid out of new lending by the bank is not income
Memorandum interest since the NPA date — estimate
Outstanding on which interest runs (₹)
Contracted rate (% p.a.)
Days since the NPA date
Income to reverse
₹3,15,000
Debit to Profit and Loss
Income on realisation
₹50,000
Cash actually received towards interest
Memorandum interest
₹2,40,658
Tracked off the books, not in gross advances
The working
Interest credited to income in the current year, unrealised at the NPA date₹1,20,000
Interest credited to income in earlier years, still unrealised₹1,20,000
Less: capitalised interest of a sanctioned moratorium (need not be reversed)(₹0)
Fees, commission and similar income accrued but uncollected₹15,000
Interest applied and taken to income after the NPA date₹60,000
Total reversal₹3,15,000
Less: interest realised after the NPA date, recognisable as income(₹50,000)
Net reduction in income₹2,65,000
The entry
Debit interest income and other income in Profit and Loss by ₹3,15,000. The credit goes to wherever the unrealised income was being carried — the borrower’s account, interest receivable, or an unrealised-interest contra — which depends on the bank’s system. From the NPA date no further interest is applied to the account; it is recorded in a memorandum account only, and that memorandum balance is left out of gross advances.

Not sure the account is NPA yet, or what to provide on it? Run the NPA classification calculator first. A reversal the branch has not passed goes into the Memorandum of Changes.

How income recognition changes when an account turns NPA — FY 2025-26 and FY 2026-27

A bank may recognise income on accrual only on advances classified as standard. For everything else — including advances guaranteed by a Government — income is recognised on actual receipt. The rule sits in the income-recognition chapter of the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025, issued on 28 November 2025, which replaced the Master Circular on IRACP that RBI used to reissue each April. The moment an account crosses into NPA, two things follow. First, the entire interest accrued and credited to the income account in past periods is reversed if it has not been realised. Second, the bank stops applying interest to the account.

The reversal is wider than the current quarter’s interest. It reaches unrealised interest of earlier years, and it reaches fees, commission and similar income, which cease to accrue and are reversed for past periods if uncollected. On leased assets the unrealised finance charge is reversed or provided for in the same way. Two things stay out. Interest on advances against term deposits, National Savings Certificates, Kisan Vikas Patras and life insurance policies may be taken to income on the due date so long as adequate margin is available. And where a loan carried a moratorium on payment of interest and turns NPA after the moratorium is over, the capitalised interest corresponding to the moratorium period need not be reversed.

After the NPA date the interest does not disappear; it moves off the books. The bank continues to record accrued interest in a memorandum account, and that balance is not counted in gross advances. Money that later comes in can be taken to income as interest realised, but only if the credit is not out of a fresh or additional facility sanctioned to the same borrower. This is the position for commercial banks for periods up to 31 March 2027. RBI’s Expected Credit Loss directions, issued on 27 April 2026, apply from 1 April 2027; co-operative banks, small finance banks and NBFCs have their own directions built on the same principle.

Worked example — term loan flagged a month late in FY 2026-27

A term loan of ₹60 lakh carries interest at 12%, about ₹60,000 a month. The borrower stopped paying after January 2026. Interest for February and March 2026 was booked to income in FY 2025-26; interest for April and May 2026 was booked in FY 2026-27. The account should have been classified NPA at the end of May 2026, but the branch flagged it only in July, after booking June interest as well. An inspection charge of ₹15,000 is also accrued and unpaid. In August the borrower pays ₹50,000 from own funds, appropriated to interest. The half-year closes on 30 September 2026.

Inputs
Unrealised interest — current year (April, May)₹1,20,000
Unrealised interest — earlier year (February, March)₹1,20,000
Fees accrued, uncollected₹15,000
Interest applied after the NPA date (June)₹60,000
Interest realised after the NPA date₹50,000 — own funds
Memorandum estimate₹60,00,000 × 12% × 122 days
Output
Total reversal1,20,000 + 1,20,000 + 15,000 + 60,000 = ₹3,15,000
Income on realisation₹50,000
Net reduction in income₹2,65,000
Memorandum interest, 1 June to 30 September≈ ₹2,40,658
All three months of the current year’s interest come out, and so do the two months booked in the previous year — the reversal is not confined to the year in which the account slipped. The June interest should never have been applied; a late NPA flag does not make it income. The ₹50,000 received in August is income because it came from the borrower and not from further lending. If the branch has not passed the reversal, the statutory branch auditor carries ₹3,15,000 less the ₹50,000 into the Memorandum of Changes as a reduction in interest income, alongside the reclassification and the provision.

Common mistakes

Reversing only the current year’s interest
The Directions require reversal of the entire interest accrued and credited to income in past periods that remains unrealised. Interest of an earlier year that is still outstanding on the NPA date is reversed through the current Profit and Loss account as well.
Letting the system apply interest after the NPA date
Where the NPA flag is set late — manually, or after a quarter-end review — the core banking system keeps charging interest in between. Every rupee applied after the date the account ought to have been NPA is reversed, and the date is the day the account met the test, not the day someone marked it.
Forgetting fees and commission
Processing charges, inspection charges, guarantee commission and similar income cease to accrue on NPA accounts and are reversed for past periods if uncollected. They are often left behind because they sit in a different income head from interest.
Taking interest to income out of the bank’s own money
Interest realised on an NPA is income only if the credit is not out of fresh or additional facilities sanctioned to the borrower. An ad-hoc limit or a new loan whose proceeds service the old account’s interest produces no income and raises an evergreening question.
Assuming a Government guarantee keeps income on accrual
A guarantee may affect when the account is classified NPA, but income on any facility that is not standard — Government-guaranteed ones included — is recognised on cash basis.
Counting memorandum interest in the outstanding
Interest recorded in the memorandum account after the NPA date is not part of gross advances. Adding it to the balance overstates both advances and gross NPAs.
Stretching the deposit-backed exception
Income on advances against term deposits, NSCs, KVPs and life policies may continue on the due date only while adequate margin is available. Once the dues exceed the security value, the exception no longer protects the income.

Frequently asked questions

What happens to interest when a loan becomes NPA?+
The bank stops recognising interest on accrual. The entire interest accrued and credited to income in past periods that has not been realised is reversed by debiting Profit and Loss, further application of interest stops, and interest accruing afterwards is recorded only in a memorandum account.
Is interest of earlier years also reversed when an account becomes NPA?+
Yes. The requirement covers interest credited to income in past periods, not just the current year, to the extent it remains unrealised on the date the account becomes NPA.
Are fees and commission on an NPA account reversed too?+
Yes. Fees, commission and similar income that have accrued cease to accrue in the current period and are reversed for past periods if uncollected.
Can interest recovered on an NPA be taken to income?+
Yes, on realisation — provided the credits towards interest are not out of fresh or additional credit facilities sanctioned to the borrower. How a recovery is split between principal and interest follows the loan agreement and the bank’s appropriation policy, applied consistently.
What is the memorandum account for NPA interest?+
An off-book record of the interest that continues to accrue on an NPA under the contract. The bank keeps it so the full claim on the borrower is known, but the amount is neither income nor part of gross advances.
Does NPA interest reversal apply to Government-guaranteed advances?+
Yes for income. Credit facilities not classified as standard, including those guaranteed by a Government, are on cash basis for income recognition.
Which advances are exempt from NPA interest reversal?+
Advances against term deposits, National Savings Certificates, Kisan Vikas Patras and life insurance policies: interest may be taken to income on the due date if adequate margin is available. Separately, where a loan had a moratorium on interest and turned NPA after the moratorium ended, the capitalised interest of the moratorium period need not be reversed.
Which RBI circular governs NPA interest reversal in FY 2026-27?+
For commercial banks, the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025, dated 28 November 2025. It took the place of the annual Master Circular on IRACP, whose last edition was dated 1 April 2025. RBI’s Expected Credit Loss directions of 27 April 2026 take effect from 1 April 2027.
How does a branch auditor report unreversed NPA interest in the 2026-27 bank audit?+
Through the Memorandum of Changes: reduce interest income by the unrealised interest and fees that should have been reversed, net of interest properly recognised on realisation, together with the change in classification and the additional provision. The observation also belongs in the LFAR comments on income recognition.

Authoritative sources

RBI
Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 — RBI/DOR/2025-26/164, 28 November 2025. Income-recognition chapter: accrual only for standard assets; reversal of unrealised interest, fees and commission on an account turning NPA; memorandum account; interest realised on NPAs. Read the version current on the reporting date.
RBI
Prudential norms on IRACP — Clarifications (November 12, 2021) — RBI/2021-2022/125 — source of the day-end NPA stamping and of the rule that capitalised interest of a moratorium period need not be reversed where the loan turns NPA after the moratorium; since carried into the consolidated Directions.
Always confirm against the latest version of the source. Regulations evolve and amendments are common.
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Last reviewed: 2026-10-01 · For informational purposes only — not professional advice.