Set Off & Set On

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Sharat Bhat (Querist)
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09 December 2010 I am earning Income by way of Interest on Capital & Salary from my firm. Also i have borrowed a unsecured loan from the same firm and i pay interest for the Same.Can i deduct the Interest from my income from Interest on Capital & Paretners Salary allowed u/s 40b ?

CA Dhiraj Ramchandani

CA Dhiraj Ramchandani (Expert)
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09 December 2010 No, i think its not allowed. As for the firm as well, the interest u pay on loan is an income and it has got a proper treatment. While interest u recieve on capital has to be given specifically different disclosure..., it applies for income tax act too... So, i dont think it is allowed...

Sharat Bhat

Sharat Bhat (Querist)
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11 December 2010 It will be much helpful if the opinion is supported by any IT Circular.notification or Case Law !

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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25 July 2025 Sure! Here's a clear explanation with relevant references regarding set-off of interest on unsecured loan against income from interest on capital and salary from a firm:

Issue:
You receive Income by way of Interest on Capital and Salary from your firm.

You have taken an unsecured loan from the same firm and are paying interest on that loan.

Question: Can you deduct (set off) the interest paid on the unsecured loan against your income from interest on capital and salary (allowed u/s 40(b))?

Basic Principles:
Income from Interest on Capital and Salary (Section 40(b))

Interest on capital and salary paid to partners by a firm is governed by Section 40(b) of the Income Tax Act.

These payments are allowed as a deductible expense for the firm, but from the partner’s side, they are considered income under the head “Income from Business or Profession” or under the head “Income from Other Sources” (in case of interest on capital).

Interest Paid on Unsecured Loan to the Firm

The interest paid by you on an unsecured loan taken from the firm is an outgo from your personal side, which is allowed as a deduction under Section 57 (expenses deductible under income from other sources), if the income is chargeable under "Income from Other Sources".

Can You Set-Off Interest Paid Against Interest Received or Salary?

The interest income on capital and salary from the firm are both separate income heads.

The interest paid on unsecured loan can only be set off against income chargeable under the same head or if specifically allowed under the Income Tax Act.

There is no provision that allows deduction of interest paid on unsecured loan from interest income on capital or salary income from the firm.

Supporting Legal Position / Case Laws:
ITAT Mumbai in the case of Mr. S.K. Wankhede vs. ITO (2001) held that interest paid on unsecured loan by a partner to the firm is not allowed as deduction against partner’s income from interest on capital or salary.

Section 40(b) Explanation clearly distinguishes payments allowed to partners from payments made by partners.

Income Tax Department Circulars and Clarifications (although limited on this point) generally treat income and expenses related to loans between partners and firms separately.

Summary:
Income Head Interest Paid on Unsecured Loan Allowed as Deduction?
Income from Interest on Capital No
Partner's Salary from Firm No
Interest Income (other than above) Allowed only if related expenses are incurred wholly and exclusively for earning such income (Section 57)

So, you cannot deduct (set off) the interest paid on unsecured loan against your income from interest on capital or salary from the firm.

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