Unsecrued loan

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

18 September 2013 Dear Sir,
There is two brothers are partner in a firm. Now one partner want to retire from the firm and wish not to withdraw his capital portion from the firm.
In such condition whether the firm can give him interest considering his capitat as unsecured loan from the date of his retirement.

Please clarify.
It's urgent.

CA Mohit Bansal

CA Mohit Bansal (Expert)
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18 September 2013 Yes. Dues of outgoing partners can be shown as unsecured loan.

Querist : Anonymous

Querist : Anonymous (Querist)

18 September 2013 For this what are the paper formalties are to do and whether the firm can give interest @12%.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Here’s how it typically works when a partner retires but doesn’t withdraw their capital and the firm treats it as an unsecured loan:

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### 1. **Can the firm treat the retiring partner’s capital as an unsecured loan?**

Yes, the firm can treat the retiring partner’s capital as an unsecured loan if the partner agrees. This means the firm owes that amount to the retired partner as a loan.

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### 2. **Can the firm pay interest on that amount?**

Yes, the firm **can pay interest** on that amount, provided:

* It is agreed between the partners.
* The interest rate is reasonable and agreed (12% is common and generally acceptable unless the partnership deed specifies otherwise).

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### 3. **What formalities should be done?**

* **Agreement/Resolution:**
A written agreement or resolution should be passed by the partners documenting:

* The retirement of the partner.
* Treatment of the capital as unsecured loan.
* Rate of interest and payment terms.

* **Amendment in Partnership Deed (if required):**
If the partnership deed is silent on this, it’s advisable to amend the deed to incorporate this arrangement.

* **Accounting Treatment:**
The firm should record the retiring partner’s capital as a **loan liability** and pay interest accordingly.

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### 4. **Legal/Tax Implications:**

* **Interest Paid:**
The interest paid by the firm will be treated as an expense in the firm’s books and taxable accordingly.

* **Loan Status:**
Since this is an unsecured loan, the partner is a creditor and not a partner for that loan portion.

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### Summary:

| Query | Answer |
| ----------------------------------------- | --------------------------------------------------------------- |
| Can capital be treated as unsecured loan? | Yes, if agreed. |
| Can interest be paid @12%? | Yes, if agreed by partners and documented. |
| Formalities needed? | Written agreement/resolution; amend partnership deed if needed. |

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If you want, I can help draft a sample agreement or resolution for this arrangement. Would you like that?

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