Suppose you have loaned someone else INR 10K for a period of 5 years and that the loan agreement states that the loan will not be paid back in equal monthly installments (the EMI that so fascinates every Indian as a wholly new concept) but rather that the borrower will pay back INR 12K after five years. For those counting, this is equivalent to 4% simple interest per annum. So, you don't actually receive the interest every year and you can point to the loan agreement and say that nowhere does it say that interest accrues every year, only that the borrower will pay back INR 12K in five years and so you will get INR 2K in actual interest income five years down the road, not right now. But the Indian Income Tax laws say that regardless of what the loan agreement says, interest is deemed to accrue during each year, and is taxable income to the lender for that year, even though the money has not showed up on the lender's books as interest received. In Year 5, when the INR 12K is received from the borrower, income tax is due only on that year's installment of accrued interest, not on the whole INR 2K of interest.
Take another view of the matter. In India, you can put money into fixed deposits (FDs) at the bank, essentially loaning the bank (INR 10K at 4% p.a. for 5 years, say), and the bank pays interest on the deposit (usually quarterly installments of INR 100) into your savings account, and you pay tax on that interest (perhaps via TDS, tax deducted at source). In other countries (e.g. the US), one can get certificates of deposit (CDs) in which the interest accrues inside the CD and you don't receive the actual cash interest until the CD matures 5 years later. Nonetheless, the bank declares to the Income Tax authorities that the CD owner received the interest accrued in each year, and that money is taxable income for that year. In short, what Indian Income Tax law is saying is that the same rules apply to loan agreements specifying that the interest will be paid only at loan maturity: the interest is deemed to accrue and is taxable income for each year, even though no cash interest has been paid by the borrower that year. The income tax people want their cut now, not five years down the road.
A loan (or a bank deposit) accrues interest continuously but for ease of bookkeeping, the interest is posted to the account typically monthly. If the borrower wishes to pay off a loan in the middle of the month (bank depositor wants to close out the account in the middle of the month), the payoff amount the borrower must pay is the balance as of the last posting of interest plus all interest accrued as of the date of payoff even though that interest has not yet posted to the account (bank depositor receives last balance plus all accrued interest as of the date of closing). For a five-year loan with no monthly payments, just a balloon payment of principal plus all interest accrued over the five years, the Indian Income Tax law is saying "Unh, Unh, regardless of what the loan agreement says, the lender is deemed to have earned the accrued interest every year and must pay income tax on that deemed interest regardless of whether the interest has just accrued but not yet posted to the account on the books of the lender."