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Can a private firm raise loans from individual sources?

B S BHMRA (Managing Partner) (102 Points)

02 January 2012

Dear Members,

Hello!

1. Can a private proprietorship or partnership firm raise loans for his business, from private individuals, and what is the maximum interest under law, which he can pay to the individuals, from whom loans are taken? Can he pay high interest @ 5% per month, if he can afford the same, does law permit it? What is TDS to be deducted from such interest payment?

2. Is any sort of an official document required to be maintained, for Income Tax purpose for such loans?

3. Is there any restriction on the maximum amount , and the number of individuals from whom loans can be accepted through such sources?

Thanking you ,

B S

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Devendra (Chartered Accountant) (4775 Points)
Replied 02 January 2012

1) Private Loans can be raised by Prorpietor / Partner from Individuals for Business purpose. Interest can be charged on such loan, there is no limit for charging such Interest. But if the Interest paid goes beyond Rs. 5000/-, then he shall be liable to deduct TDS @ 10% u/s 194A of the Income Tax Act, 1961.

2) A Loan Balance Confiramtion Letter from the Lender shall be sufficient to serve the Income Tax purpose.

3) Cash Loans from Rs. 20000/- are not allowed under the Income Tax Act, but Loansborrowed through Account Payee cheque has no limit, as far as the Business purpose is served. Also there is no limit to the number of people from whom Loan can be borrowed.

Regards,

Devendra Kulkarni

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