Interest on loan under section 186

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

18 May 2016 Dear All,

What will be the rate for charging interest on loan given by the Company to other Companies in the Financial Year 2015-16 .

Thanks and Regards,

Srirang

Jatin Bajaj

Jatin Bajaj (Expert)
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18 May 2016 According to Section 186(7), No Loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year government security closest to the tenor of the loan.

Querist : Anonymous

Querist : Anonymous (Querist)

18 May 2016 Hi, Thanks for your help. Actually I am looking for the effective rate of interest to be charged.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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01 August 2024 Under Section 186 of the Companies Act, 2013, the rate of interest to be charged on loans provided by a company to other companies is subject to certain provisions and regulatory requirements. Here’s a detailed explanation:

### **Interest on Loans Under Section 186:**

**1. **Provisions of Section 186:**

- **Section 186** of the Companies Act, 2013 deals with the provision of loans and advances by a company to other companies, or to its own employees, and the conditions related to such transactions.

- According to Section 186, a company can provide a loan to another company or to its subsidiaries or associates subject to the approval of the Board of Directors and, in certain cases, approval from the shareholders.

**2. **Rate of Interest:**

- **Rate of Interest:** Section 186 itself does not prescribe a specific rate of interest for loans. Instead, it mandates that the rate of interest should be as per the terms agreed upon between the lending and borrowing companies.

- **Market Rate:** Generally, the rate of interest charged on loans should be at least at par with the prevailing market rate to ensure that the loan is not considered as providing undue benefit to the borrowing company or its shareholders.

**3. **Financial Year 2015-16:**

- **Prevailing Rates:** For the financial year 2015-16, there was no specific rate of interest mandated by Section 186. Companies typically followed market rates or the rates prescribed in their internal policies or agreements.

- **Compliance:** It is crucial for companies to ensure that the rate of interest charged is fair and in line with the agreements made. The interest rate should not be excessively low or high to avoid any regulatory scrutiny or implications of undue advantage.

**4. **Regulatory Guidelines:**

- **Income Tax Act:** From an income tax perspective, the rate of interest should also be consistent with the arm's length principle, especially if the companies are related parties.

- **Fair Market Value:** Ensure that the interest rate is in line with the fair market value and the terms of the loan agreement.

### **Summary:**

- **Effective Rate of Interest:** There is no specific rate prescribed under Section 186. The rate should be determined based on market conditions and the terms agreed upon between the lending and borrowing companies.

- **Regulatory Compliance:** Ensure compliance with market rates and internal company policies, and be mindful of fair market value principles to avoid any regulatory issues.

If you need specific historical data or further assistance with rates, consulting with a financial advisor or legal expert would provide tailored advice based on your exact situation.

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