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Loan to brother

Anand (student) (116 Points)

26 July 2013

I have a properitership Concer and I have taken OD facility from a bank @ 12%, this mony is use to give loan to my brother for this business.
Q1: Can I take interest on such loan from my brother? (if Yes)
Q2: How much will be the rate of interest (hire or lower from OD interest rate)?
Q3: Can I Show interest paid on OD as Business expenses and per PGBP.

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4 Replies

CA and CMA Ravinder Singh (CA and CMA) (853 Points)
Replied 26 July 2013

Answers:

1. yes, you can take interest on such loan from your brother.

2. there is no limit on interest rate. (wait for others to comment).

3. and yes you can show the interest paid on OD as business expense..

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CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 26 July 2013

As far as my experience is concerned., you need to charge your brother interest at bank rate only.., reasong being:

A. If you charge LOWER rate., it will amount to higher expense of yours., i.e. you pay higher interest to bank and collect lesser.., that means you are claiming additional interest as "net expense" that would be disallowed by income tax.

B. If you charge HIGHER rate., it will amount to higher expense of your brother., in that case, he would end up in claiming additional expense.., which would again be disallowed by authorities..

So., being on safer side., i would suggest you to charge either bank rate or any average loan rate (around 11.56% currently) prevailing in market at that point of time.

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Anand (student) (116 Points)
Replied 04 August 2013

Dear All

1st of all thank you very much.

Further, With Respect to Above,

Is There is any Requirment to Deduct TDS by my Brother (he is Individual and Runing Propritership Conern) on the Interest Rs. 4 lacs (without effect of TDS).