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Proprietorship firm and unsecured loans interest rates

mka (Finance Executive) (50 Points)

18 March 2012

Dear Friends,

My Proprietorship firm has unsecured loans from 4 close relatives. During FY 2010-2012 interest was paid to all the 4 individuals (2 of them @ 12% and 2 of them @ 10%).

During FY 2011-2012 can I pay interest only to 2 of the relatives @ 12% and not pay the other two? Can the interest rate be reduced to 8%? TDS is deduceted when the interest is paid.

Thanks in advance.

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5 Replies

Anumanchipalli Sathikonda (Tax Consultant) (1349 Points)
Replied 20 March 2012

Mr.MKA

What is the method of accounting regularly and consistingly being followed by you - is it mercantile method or cash basis? Your question cannot be answered unless you reveal your method of accounting.

Best Wishes

Sathikonda

bcshettyco (Chartered Accountant In Practice) (65 Points)
Replied 20 March 2012

If you are coming u/s 44AB and If the interest payment exceeds 5000/- per annum per person, you have to deduct tds @ the rate of 10%.

It is optional for you to pay the interest @ the rate of 10% or 8% or nil.

mka (Finance Executive) (50 Points)
Replied 20 March 2012

Mr. Sathikonda,

I follow the mercantile method of accounting.

Thanks

Anumanchipalli Sathikonda (Tax Consultant) (1349 Points)
Replied 20 March 2012

Mr.MKA

The rate of interest can be changed by re-executing the promissory note or any other document between the parties. But the decision not to pay interest to the two lenders may create some suspicion in the minds of the Income-tax Authorities in respect of genuiness of the loan. There is no statutory provision in this regard. It all depends on the facts of the case.

If you do not pay interest for one year and if you want to pay the interest in the next year for the earlier also i.e. interest for the year in which you did not pay and the interest for that year, the interest for the prior period will not be allowed as a deduction from your profits since you are following mercantile system of accounting.

Best Wishes

.Sathikonda