Loan to director
This query is : Resolved
20 August 2016
Can a private company give loan to director according to
companies act 2013 and whether same is allowable under income tax too ??
Plz reply
20 August 2016
Pl see section 185 and section 2 (22)(e) of the Companies Act,2013 and Income tax Act,1961 respectively.
22 August 2016
Dear Sir,
As per the GSR 464 (E) dated 5 June 2015, Sec 185 will not apply to pvt comp. on following of some conditions.
So if comp. can give loan then it has to deduct tds in sec 194 and the same will be taxable in the hand of director and company can claim the same in it.
is it correct ?
Plz clarify sir
03 August 2024
Under the Companies Act, 2013 and Income Tax Act, there are specific regulations concerning loans to directors and their taxation. Here’s a detailed explanation:
### **1. Loans to Directors under the Companies Act, 2013**
**Section 185 of the Companies Act, 2013:**
- **General Prohibition:** Section 185 generally prohibits a company from providing any loan, guarantee, or security to its directors or any person in whom the director is interested.
- **Exceptions:** As per the Companies (Amendment) Act, 2017, the provisions of Section 185 do not apply to a private company if it meets the following conditions:
1. **Loan to Managing Director/Whole-Time Director:** The loan must be given to a managing director or a whole-time director, provided it is approved by a special resolution and the loan is used for the purpose of business.
2. **Loan to Group Company:** Loans given by one private company to its holding company or its subsidiary or another company within the same group are exempt from Section 185, subject to certain conditions and compliance with Section 186.
### **2. Tax Implications under the Income Tax Act**
**Taxability of Loans to Directors:**
- **Income Tax Treatment:** If a private company provides a loan to a director, the director must include the loan amount as income in their tax return if it is not returned or if the loan is interest-free.
- **Interest on Loans:** If the loan is interest-free or provided at a lower interest rate than the market rate, the difference between the market rate of interest and the actual rate charged can be considered as a perquisite and would be taxable in the hands of the director under the head “Income from Salaries.”
**Tax Deducted at Source (TDS):**
- **Section 194A:** The company must deduct TDS under Section 194A on interest paid on loans exceeding ₹5,000 in a financial year to any person (including directors). If the loan is interest-free, there is no TDS obligation. However, the director must disclose the amount in their income tax return.
### **3. Compliance and Documentation**
**Companies Act, 2013:**
1. **Board Approval:** Ensure that the loan is approved by the Board of Directors and, where applicable, by a special resolution.
2. **Disclosures:** Disclose the loan and its terms in the financial statements of the company as per accounting standards.
**Income Tax Act:**
1. **Tax Returns:** The director must declare the loan amount and any taxable interest or perquisites in their income tax return.
2. **Interest Payments:** If interest is charged on the loan, it should be accounted for and TDS should be deducted accordingly.
### **4. Summary**
1. **Under the Companies Act, 2013:**
- Loans to directors are generally prohibited but exceptions exist for private companies under specific conditions.
- Loans to managing or whole-time directors and loans within the group companies are permitted under certain conditions.
2. **Under the Income Tax Act:**
- Loans to directors must be declared as income if they are interest-free or at below-market rates.
- Interest on loans must be reported, and TDS should be deducted if applicable.
### **Reference to GSR 464 (E) dated June 5, 2015:**
The GSR 464 (E) notification outlines exceptions and modifications to Section 185, primarily impacting private companies and their ability to grant loans under specific conditions.
If you have specific queries or require detailed advice, consulting with a company secretary or tax advisor would be beneficial to ensure compliance with both the Companies Act and Income Tax Act.
### **1. Loans to Directors under the Companies Act, 2013**
**Section 185 of the Companies Act, 2013:**
- **General Prohibition:** Section 185 generally prohibits a company from providing any loan, guarantee, or security to its directors or any person in whom the director is interested.
- **Exceptions:** As per the Companies (Amendment) Act, 2017, the provisions of Section 185 do not apply to a private company if it meets the following conditions:
1. **Loan to Managing Director/Whole-Time Director:** The loan must be given to a managing director or a whole-time director, provided it is approved by a special resolution and the loan is used for the purpose of business.
2. **Loan to Group Company:** Loans given by one private company to its holding company or its subsidiary or another company within the same group are exempt from Section 185, subject to certain conditions and compliance with Section 186.
### **2. Tax Implications under the Income Tax Act**
**Taxability of Loans to Directors:**
- **Income Tax Treatment:** If a private company provides a loan to a director, the director must include the loan amount as income in their tax return if it is not returned or if the loan is interest-free.
- **Interest on Loans:** If the loan is interest-free or provided at a lower interest rate than the market rate, the difference between the market rate of interest and the actual rate charged can be considered as a perquisite and would be taxable in the hands of the director under the head “Income from Salaries.”
**Tax Deducted at Source (TDS):**
- **Section 194A:** The company must deduct TDS under Section 194A on interest paid on loans exceeding ₹5,000 in a financial year to any person (including directors). If the loan is interest-free, there is no TDS obligation. However, the director must disclose the amount in their income tax return.
### **3. Compliance and Documentation**
**Companies Act, 2013:**
1. **Board Approval:** Ensure that the loan is approved by the Board of Directors and, where applicable, by a special resolution.
2. **Disclosures:** Disclose the loan and its terms in the financial statements of the company as per accounting standards.
**Income Tax Act:**
1. **Tax Returns:** The director must declare the loan amount and any taxable interest or perquisites in their income tax return.
2. **Interest Payments:** If interest is charged on the loan, it should be accounted for and TDS should be deducted accordingly.
### **4. Summary**
1. **Under the Companies Act, 2013:**
- Loans to directors are generally prohibited but exceptions exist for private companies under specific conditions.
- Loans to managing or whole-time directors and loans within the group companies are permitted under certain conditions.
2. **Under the Income Tax Act:**
- Loans to directors must be declared as income if they are interest-free or at below-market rates.
- Interest on loans must be reported, and TDS should be deducted if applicable.
### **Reference to GSR 464 (E) dated June 5, 2015:**
The GSR 464 (E) notification outlines exceptions and modifications to Section 185, primarily impacting private companies and their ability to grant loans under specific conditions.
If you have specific queries or require detailed advice, consulting with a company secretary or tax advisor would be beneficial to ensure compliance with both the Companies Act and Income Tax Act.
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