Loan by Partnership Firm

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MAKARAND DAMLE (Querist)
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24 June 2026 Partnership is getting applying for loan under Jan Samarth Scheme Working Capital Term Loan
Can the loan funds be given to partners as loan
partners will pay back emi loan with interest so that the firm does not incur any additional expense

Is above arrangement allowed under income tax act

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
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24 June 2026 If the loan is sanctioned to the partnership firm for business/working capital purposes, diversion of the funds to partners for their personal use may lead to disallowance of interest under Section 36(1)(iii) if business expediency is not established. Further, such utilization may violate the terms of the bank’s sanction. If the advance to partners is permitted by the partnership deed, properly documented as a loan, and interest is charged at a reasonable rate, the tax risk may reduce; however, compliance with the bank’s end-use conditions remains crucial. Therefore, the loan sanction terms should be examined before proceeding.

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