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Interest on unsecured loan

Nupur Sharma (CA) (426 Points)

30 April 2013

We are finalising the books of a Listed Co. I have been asked to provide for the interest expense on an unsecured loan that we had taken from a related party.

At what rate of interest should i book this expense? Is there a statutory limit on the maximum rate of interest that would be allowed as expense???

Plz help!

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Prashanth S K (Practice) (148 Points)
Replied 30 April 2013

I hope both are Indian companies and hence no applicability of transfer pricing guidelines and even domestic transfer pricing guidelines as your case may not cross the limit specified for it. Apart from these the applicable sections which i can imagine is 372A of the companies act and 40A(2)(b)of the income tax act. According to 372A interest rate shall not be lower than the prevailing bank rate and hence thats the minimum rate to be taken. While 40A(2)(b) holds that the A.O is at the discretion of disallowance of any excessive or unreasonable expenditure made by the assessee to the parties as given in the section. So he might or might not disallow based on his discretion. Hence best is to take the prevailing bank rates prescribed by RBI Act.

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