Interest Act, 1978
3. Power of court to allow Interest.-
(1) In any proceeding for the recovery of any debt or damage or in any proceedings in which a claim for interest in respect of any debt or damages already paid is made, the court may, if it thinks fit, allow interest to the person entitled to the debt or damages or to the person making such claim, as the case may be, at a rate not exceeding the current rate of interest, for the whole or part of the following period, that is to say;-
(a) If the proceedings relate to a debt payable by virtue of a written instrument at a certain time ,then from the date when the debt is payable to the date of institution of the proceedings;
(b) if the proceedings do not relate to any such debt, then, from the date mentioned in this regard in a written notice given by the person entitled orthe person making the claim to the person liable that interest will be claimed to the date of institution of the proceedings:
Provided that where the amount of the debt or damages has been repaid before the institution of the proceedings, interest shall not be allowed under this section for the period after such repayment.
(2) Where in any such proceedings as are mentioned in sub-section (1):-
(a) judgment , order or award is given for a sum which, apart from interest on damages, exceeds four thousand rupees, and
(b) the sum represents or includes damages in respect of personal injuries to the plaintiff or any other person or in respect of a person's death. then, the power conferred by that sub-section shall be exercised so as to include in that sum interest on those damages or on such part of them as the court considers appropriate for the whole or part of the period from the date mentioned in the notice to the date of institution of the proceedings, unless the court is satisfied that there are special reasons why no interest should be given in respect of those damages.
(3)Nothing in this Section;-
(a) shall apply in relation to:-
( i ) any debt or damages upon which interest is payable as of right, by virtue of any agreement; or
(ii) any debt or damages upon which payment of interest is barred, by virtue of an express agreement;
(b) shall affect:-
( i ) the compensation recoverable for the dishonour of a bill of exchange, promissory note or cheque, as defined in the Negotiable instrument Act, 1881: or
(ii) the provisions of rule 2 of Order II of the First Schedule to the Code of Civil Procedure, 1908;
(c) shall empower to court to award interest upon interest.
Comment: Under certain circumstances even compound interest may be allowed by Courts, especially when dealing with commercial or bank contracts. See Renusagar Power Co. Ltd. v. General Electric Co AIR 1994 SUPREME COURT 860