Query – Interest on Capital Received by Partner from Firm

Query – Interest on Capital Received by Partner from Firm

A partner has received interest on capital from the partnership firm. At the same time, the partner has paid interest on a loan, which was borrowed and subsequently diverted/invested in the partnership firm.

In earlier years, the net interest—i.e., interest received from the firm less interest paid on the loan—has generally been reported as business income in ITR-3 under Schedule BP, and the same has been processed by the Income Tax Department without any issue.

However 94T TDS section introduced for AY 2026-27, so TDS has been deducted under Section 94T on the interest paid by the firm to the partner on capital. Consequently, the gross interest received from the firm is now reflected in Form 26AS/AIS.

The issue is that if only the net interest income (interest received less interest paid) is reported in the ITR, there may be a mismatch between the income reported in the return and the gross interest reflected in Form 26AS/AIS due to the TDS reporting.

Query:
How should the partner claim the deduction for interest paid on the loan in ITR-3 for AY 2026-27? Specifically, where should the interest paid on the borrowed funds be reported so that the gross interest reflected in Form 26AS/AIS is reconciled with the net taxable business income?