Unsecured loans in case of proprietary firm
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
26 June 2014
dear expert,
what are the provisions (regarding payment, interest etc) which are to be followed by proprietary firm if it takes unsecured loans & from whom it can take such loans?
thanks a lot !
what are the provisions (regarding payment, interest etc) which are to be followed by proprietary firm if it takes unsecured loans & from whom it can take such loans?
thanks a lot !
26 June 2014
if prop firm books are liable to take audit u./s 44AB then you have to deduct the TDS on intt u/s 194A if you pay intt. in year exceed Rs. 5000/- per person. if PAN available if PAN not available then TDS @ 20% will be deducted.
Querist : Anonymous
Querist :
Anonymous
(Querist)
27 June 2014
can it take unsecured loan from any person & whether payment of interest is compulsory?
02 August 2025
Yes, a **proprietorship firm** can take **unsecured loans**, but there are important tax and legal considerations to be aware of.
---
## ✅ **1. From Whom Can a Proprietorship Take Unsecured Loans?**
Since a proprietorship and its proprietor are **not separate legal entities**, the firm can take loans from:
* **Relatives**
* **Friends**
* **Other individuals**
* **Companies**, **partnerships**, or **HUFs** (with due documentation)
There is **no specific restriction** under the Income Tax Act or any other law on **who** the lender can be — as long as:
* The lender is not prohibited under any other regulation (e.g., NBFCs must comply with RBI norms).
* The loan is **not a benami transaction**.
---
## 💰 **2. Interest on Loan – Is it Compulsory?**
No, **interest is not mandatory**.
* A proprietorship **can take an interest-free loan**, especially from relatives or friends.
* However, if interest is **agreed contractually**, then it **must be paid**, and **TDS rules apply**.
---
## 🧾 **3. TDS on Interest – Section 194A**
If the **proprietor’s business is subject to tax audit** under **Section 44AB**, then:
* **TDS @10%** must be deducted on interest paid **over ₹5,000 per lender per year** (₹40,000 in case of senior citizens).
* If **PAN is not available**, TDS must be **20%**.
* TDS must be **deposited monthly** and **TDS returns filed quarterly**.
> 💡 If the business is **not liable for tax audit**, **TDS is not required** even if interest is paid.
---
## 💵 **4. Cash Payment Limit – Section 269SS & 269T**
You must be very careful about **cash transactions**:
* **Section 269SS**: You **cannot accept a loan of ₹20,000 or more** in **cash** — must be via **banking channel**.
* **Section 269T**: Repayment of loan **₹20,000 or more** should also be via **banking channel**.
Violation may attract **penalty equal to the amount of loan accepted or repaid in cash**.
---
## 📋 **5. Recommended Documentation**
* Loan agreement (not mandatory, but good for clarity)
* PAN of lender
* Interest payment schedule (if applicable)
* Bank transfer records
* TDS deduction details (if interest paid and tax audit applicable)
---
## 📝 Summary Table
| Topic | Rule/Provision |
| ---------------------------- | -------------------------------------------------------- |
| From whom loans can be taken | Any person, including relatives, friends, entities |
| Is interest compulsory? | No – optional, based on agreement |
| TDS applicable? | Yes, if tax audit u/s 44AB applies and interest > ₹5,000 |
| TDS Section | Section 194A |
| Cash transaction limit | ₹20,000 under Section 269SS & 269T |
---
Let me know if you’d like a **sample unsecured loan agreement** for a proprietorship firm or clarification on tax audit applicability.
---
## ✅ **1. From Whom Can a Proprietorship Take Unsecured Loans?**
Since a proprietorship and its proprietor are **not separate legal entities**, the firm can take loans from:
* **Relatives**
* **Friends**
* **Other individuals**
* **Companies**, **partnerships**, or **HUFs** (with due documentation)
There is **no specific restriction** under the Income Tax Act or any other law on **who** the lender can be — as long as:
* The lender is not prohibited under any other regulation (e.g., NBFCs must comply with RBI norms).
* The loan is **not a benami transaction**.
---
## 💰 **2. Interest on Loan – Is it Compulsory?**
No, **interest is not mandatory**.
* A proprietorship **can take an interest-free loan**, especially from relatives or friends.
* However, if interest is **agreed contractually**, then it **must be paid**, and **TDS rules apply**.
---
## 🧾 **3. TDS on Interest – Section 194A**
If the **proprietor’s business is subject to tax audit** under **Section 44AB**, then:
* **TDS @10%** must be deducted on interest paid **over ₹5,000 per lender per year** (₹40,000 in case of senior citizens).
* If **PAN is not available**, TDS must be **20%**.
* TDS must be **deposited monthly** and **TDS returns filed quarterly**.
> 💡 If the business is **not liable for tax audit**, **TDS is not required** even if interest is paid.
---
## 💵 **4. Cash Payment Limit – Section 269SS & 269T**
You must be very careful about **cash transactions**:
* **Section 269SS**: You **cannot accept a loan of ₹20,000 or more** in **cash** — must be via **banking channel**.
* **Section 269T**: Repayment of loan **₹20,000 or more** should also be via **banking channel**.
Violation may attract **penalty equal to the amount of loan accepted or repaid in cash**.
---
## 📋 **5. Recommended Documentation**
* Loan agreement (not mandatory, but good for clarity)
* PAN of lender
* Interest payment schedule (if applicable)
* Bank transfer records
* TDS deduction details (if interest paid and tax audit applicable)
---
## 📝 Summary Table
| Topic | Rule/Provision |
| ---------------------------- | -------------------------------------------------------- |
| From whom loans can be taken | Any person, including relatives, friends, entities |
| Is interest compulsory? | No – optional, based on agreement |
| TDS applicable? | Yes, if tax audit u/s 44AB applies and interest > ₹5,000 |
| TDS Section | Section 194A |
| Cash transaction limit | ₹20,000 under Section 269SS & 269T |
---
Let me know if you’d like a **sample unsecured loan agreement** for a proprietorship firm or clarification on tax audit applicability.
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