One time insurance on crane

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Querist : Anonymous

Querist : Anonymous (Querist)

19 September 2013 I am a partnership firm. I have taken 1 crore loan from bajaj finance and bajaj finance has given me 94 lacs. It has cut 6 lacs as insurance money on the ground that if in case anything happens to the loan taker, the descendants do not have to pay the balance loan. my question is what shall be the treatment of rs. 6 lacs in accounting and taxation part.

Querist : Anonymous

Querist : Anonymous (Querist)

21 September 2013 please reply as soon as possible

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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09 August 2024 The ₹6 lakhs deducted by Bajaj Finance for insurance on the loan is a significant amount and needs to be treated appropriately in your accounting and tax records. Here’s how to handle it:

### 1. **Accounting Treatment**

**A. Loan Receipt:**
- **Loan Amount Received:** When you receive the net amount of ₹94 lakhs (after the deduction of ₹6 lakhs for insurance) from Bajaj Finance, record it in your books as follows:
- **Dr. Bank Account** ₹94,00,000
- **Cr. Loan from Bajaj Finance** ₹1,00,00,000
- **Cr. Insurance Deducted** ₹6,00,000

**B. Insurance Deduction:**
- **Insurance Amount:** The ₹6 lakhs deducted for insurance should be recorded separately in your books, as it is not an expense but a deduction from the loan amount. Since this amount is likely not refundable and is for the benefit of the lender, it should be treated as a non-operating item.

**Journal Entry for Insurance Deduction:**
- **Dr. Loan from Bajaj Finance** ₹6,00,000 (to reflect the deduction in the loan balance)
- **Cr. Insurance Expenses (if classified as such)** ₹6,00,000

### 2. **Taxation Treatment**

**A. Deductibility of Insurance Premium:**
- **Non-Deductible:** The insurance premium paid or deducted by Bajaj Finance for securing the loan is generally not deductible as a business expense in your tax return. This is because it is not an expense incurred directly in the course of business operations but rather an arrangement between the lender and borrower for securing the loan.

- **Capitalization:** Since the insurance amount is deducted from the loan amount and is not paid directly by your firm, it may not need to be capitalized. It is more of a deduction that affects the loan balance rather than an expenditure you pay directly.

**B. Disclosure:**
- **Financial Statements:** Disclose the insurance deduction in the notes to accounts or financial statements. Explain that this amount was deducted by the lender and does not represent an actual cash outflow from the business.

**C. Loan Documentation:**
- Ensure that all documents and correspondence with Bajaj Finance regarding this insurance deduction are properly filed and available for reference in case of any queries from tax authorities.

### Summary

1. **In Accounting:**
- Record the ₹6 lakhs as a deduction from the loan amount.
- It is a non-operating item and should not be classified as a regular expense.

2. **In Taxation:**
- The insurance amount is generally not deductible and should not be treated as a business expense.
- Ensure proper disclosure in financial statements to clarify the nature of the deduction.

Always consult with a qualified accountant or tax advisor for personalized advice and to ensure compliance with current accounting standards and tax regulations.

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