Unsecured Loan

This query is : Resolved

Devendra (Querist)
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17 February 2011 Why do people take and give unsecured loan? Is it some kind of an adjustment to save tax? Please explain.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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17 February 2011 Unsecured loans are mainly taken for the purpose of meeting the requirement of funds in the business.
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Payment of interest on such loans definitely results into tax benefits to the borrower, but the interest out go is a bigger expenditure than the small tax savings.
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Some times unsecured loans are available interest free, on which due to relationship, interest is not payable at all.
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If funds are not required nobody will take Unsecured Loans.
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Salaried persons are, generally, not getting any benefit for interest paid on such loans.
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So borrowings are always need based.
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In case of fictitious borrowings, tax saving aspect may fail when its genuineness can not be proved by the assessee.