Unsecured Loan

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VINITHA RAJESH (Querist)
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11 January 2011 The promoters of a company contributed money for a business. A Private Limited company was to be formed for the business. The formation delayed. The money contributed by the promoters will be treated as unsecured loan funds to the company with interest. But the interest will be calculated only from the incorporation of the company. Till that period the amount invested by the promoters will not generate any returns.

Can the company give interest from a date before the formation of the company. Or can the company pay interest at a higher rate during the earlier periods and later reduce the rate.

Please advice any other methods by which the promoters can receive returns for their investment.

What is the maximum rate of interest that the company can give for the loan taken.

Anshuman Bardhan

Anshuman Bardhan (Expert)
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13 January 2011 The unsecured loan for the company will only be taken into account after the incorporation of the company since the company cannot enter into a contract before its incorporation. Interest can only be paid after the date of incorporation. Interest rates has to be according to prevailing market rate other wise it may be disallowed in the Income Tax Assessment. It is also important to look at the fact that in whose custody the money actually was prior to incorporation and the mode of giving loan to the company post incorporation to avoid any penalties under 269SS of Income Tax act.

VINITHA RAJESH

VINITHA RAJESH (Querist)
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20 February 2011 Can you please tell me what is the prevailing interest rate in market that is allowable for such deposits

Can the company pay interest at a higher rate during the earlier periods and later reduce the rate maintaining no discrimination between the investors

Anshuman Bardhan

Anshuman Bardhan (Expert)
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21 February 2011 The prevailing market rate would usually be around the bank lending rates.
The company can pay interest at different rates but there needs to be a justification for paying higher interest earlier and then lowering it, otherwise it may again be subject to dis-allowance