Inter-corporate Loan matters to be considered
This query is : Resolved
06 March 2025
what are the matters to be considered while accepting inter-corporate loan under companies ACT GST and Income Tax
12 August 2025
When dealing with inter-corporate loans under the Companies Act, GST, and Income Tax laws in India, there are several important legal, regulatory, and tax considerations to keep in mind. Here's a comprehensive overview of the key matters to consider:
1. Under the Companies Act, 2013
Section 185 (Loans to Directors, etc.):
Prohibits a company from providing loans to its directors or to companies in which directors are interested (with some exceptions).
Make sure the loan is not falling under prohibited categories.
Section 186 (Loan and Investment by Company):
Company can give loans to any person or body corporate, subject to certain limits.
The aggregate amount of loans, guarantees, or securities should not exceed 60% of the paid-up share capital, free reserves, and securities premium account or 100% of free reserves and securities premium account, whichever is more.
Board approval is mandatory.
In some cases, shareholders' approval by special resolution is required (if exceeding prescribed limits).
Register of loans must be maintained and reported in financial statements.
The loan agreement should specify terms like interest rate, repayment schedule, etc.
Disclosure Requirements:
The company must disclose loans and advances in the financial statements.
Any default in repayment should be disclosed.
2. Under GST (Goods and Services Tax)
GST Applicability on Inter-Corporate Loans:
Generally, loans or advances given or taken are considered financial services.
GST is not applicable on pure loan transactions (i.e., principal amount is not subject to GST).
However, interest received on loan is taxable under GST as it is a supply of service.
If a financial institution is involved, different rules apply for Input Tax Credit (ITC).
Documentation:
Proper documentation should be maintained to establish that the transaction is a loan and not a supply of goods or other services.
Interest invoices should be raised correctly and GST on interest should be paid accordingly.
3. Under Income Tax Act, 1961
Tax Implications for the Lending Company:
Interest income from inter-corporate loans is taxable as income from other sources or business income depending on nature.
The company should deduct TDS (Tax Deducted at Source) on interest payments to the lender under Section 194A at the applicable rates.
Tax Implications for Borrowing Company:
Interest paid is allowed as a deductible expense under Income Tax (if genuine and for business purposes).
Compliance with transfer pricing rules if the loan is between related parties (especially if cross-border).
Maintain proper documentation and agreements to justify the interest rates and terms.
General Anti-Avoidance Rules (GAAR):
Ensure that the loan is at arm's length and not structured to avoid taxes.
Additional Considerations:
Loan Agreement:
Should clearly mention the terms and conditions: amount, interest rate, repayment tenure, security/collateral (if any).
Security:
Decide whether the loan is secured or unsecured.
Interest Rate:
Should be at arm’s length; especially important for related parties to avoid tax issues.
Default and Recovery:
Have a clear process for default in repayment and recovery.
Compliance with RBI Guidelines:
If the loan is from or to a financial institution or NBFC, RBI guidelines may apply.
1. Under the Companies Act, 2013
Section 185 (Loans to Directors, etc.):
Prohibits a company from providing loans to its directors or to companies in which directors are interested (with some exceptions).
Make sure the loan is not falling under prohibited categories.
Section 186 (Loan and Investment by Company):
Company can give loans to any person or body corporate, subject to certain limits.
The aggregate amount of loans, guarantees, or securities should not exceed 60% of the paid-up share capital, free reserves, and securities premium account or 100% of free reserves and securities premium account, whichever is more.
Board approval is mandatory.
In some cases, shareholders' approval by special resolution is required (if exceeding prescribed limits).
Register of loans must be maintained and reported in financial statements.
The loan agreement should specify terms like interest rate, repayment schedule, etc.
Disclosure Requirements:
The company must disclose loans and advances in the financial statements.
Any default in repayment should be disclosed.
2. Under GST (Goods and Services Tax)
GST Applicability on Inter-Corporate Loans:
Generally, loans or advances given or taken are considered financial services.
GST is not applicable on pure loan transactions (i.e., principal amount is not subject to GST).
However, interest received on loan is taxable under GST as it is a supply of service.
If a financial institution is involved, different rules apply for Input Tax Credit (ITC).
Documentation:
Proper documentation should be maintained to establish that the transaction is a loan and not a supply of goods or other services.
Interest invoices should be raised correctly and GST on interest should be paid accordingly.
3. Under Income Tax Act, 1961
Tax Implications for the Lending Company:
Interest income from inter-corporate loans is taxable as income from other sources or business income depending on nature.
The company should deduct TDS (Tax Deducted at Source) on interest payments to the lender under Section 194A at the applicable rates.
Tax Implications for Borrowing Company:
Interest paid is allowed as a deductible expense under Income Tax (if genuine and for business purposes).
Compliance with transfer pricing rules if the loan is between related parties (especially if cross-border).
Maintain proper documentation and agreements to justify the interest rates and terms.
General Anti-Avoidance Rules (GAAR):
Ensure that the loan is at arm's length and not structured to avoid taxes.
Additional Considerations:
Loan Agreement:
Should clearly mention the terms and conditions: amount, interest rate, repayment tenure, security/collateral (if any).
Security:
Decide whether the loan is secured or unsecured.
Interest Rate:
Should be at arm’s length; especially important for related parties to avoid tax issues.
Default and Recovery:
Have a clear process for default in repayment and recovery.
Compliance with RBI Guidelines:
If the loan is from or to a financial institution or NBFC, RBI guidelines may apply.
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