Rate of interest charges from customers
This query is : Resolved
28 August 2020
Assess runs is a money lending business.assess interest charges collected from customers.
Question:
Assess rate of interest charges collected from customers under I.t. act.
Question:
Assess rate of interest charges collected from customers under I.t. act.
31 August 2020
The interest income will tax as per Income Tax Slab applicable.
19 July 2025
In the context of the Income Tax Act, 1961 (India), if an assessee is engaged in the money lending business and collects interest from customers, here’s what applies:
📌 1. Rate of Interest – Under Income Tax Act?
The Income Tax Act does not prescribe or restrict the rate of interest charged by a lender.
Rate of interest is a commercial/business decision between the lender and borrower.
However, the interest income is fully taxable under the head "Profits and Gains of Business or Profession" (if it's a registered money-lending business).
✅ Important Points to Note:
Aspect Treatment
Interest Income Taxable as business income
Rate of Interest Not governed by Income Tax Act; but may be regulated under other laws (e.g., State Money Lending Acts, RBI guidelines if NBFC)
Documentation Proper agreements and records must be maintained
TDS Applicability If lending to a business entity, TDS may be applicable on interest paid by borrower (Section 194A)
⚖️ If NBFC or Regulated Entity:
If the assessee is a Non-Banking Financial Company (NBFC), the RBI may cap or monitor interest rates to prevent usury.
If not registered with RBI, the State Money Lending Law (if applicable) may cap the maximum rate you can charge.
🧾 Example:
If you charge 24% p.a. interest on a ₹1 lakh loan for 1 year, ₹24,000 will be taxed as business income.
No issue under the I-T Act, provided the source and books are clean.
❗ Reminder:
While I-T Act has no cap, charging excessive interest can:
Attract scrutiny from tax authorities (if it looks like an attempt to inflate income)
Violate state money-lending laws (many states require registration and limit interest rates)
📌 1. Rate of Interest – Under Income Tax Act?
The Income Tax Act does not prescribe or restrict the rate of interest charged by a lender.
Rate of interest is a commercial/business decision between the lender and borrower.
However, the interest income is fully taxable under the head "Profits and Gains of Business or Profession" (if it's a registered money-lending business).
✅ Important Points to Note:
Aspect Treatment
Interest Income Taxable as business income
Rate of Interest Not governed by Income Tax Act; but may be regulated under other laws (e.g., State Money Lending Acts, RBI guidelines if NBFC)
Documentation Proper agreements and records must be maintained
TDS Applicability If lending to a business entity, TDS may be applicable on interest paid by borrower (Section 194A)
⚖️ If NBFC or Regulated Entity:
If the assessee is a Non-Banking Financial Company (NBFC), the RBI may cap or monitor interest rates to prevent usury.
If not registered with RBI, the State Money Lending Law (if applicable) may cap the maximum rate you can charge.
🧾 Example:
If you charge 24% p.a. interest on a ₹1 lakh loan for 1 year, ₹24,000 will be taxed as business income.
No issue under the I-T Act, provided the source and books are clean.
❗ Reminder:
While I-T Act has no cap, charging excessive interest can:
Attract scrutiny from tax authorities (if it looks like an attempt to inflate income)
Violate state money-lending laws (many states require registration and limit interest rates)
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