Can I Claim Interest on Business Loans as a Business Expense in India?
Yes: interest paid on loans taken for business purposes is deductible under Section 36(1)(iii) of the Income Tax Act. This includes interest on working capital loans, term loans for equipment, and overdrafts. Interest on loans for capital acquisition is capitalised with the asset cost until the asset is put to use, then deductible via depreciation. Interest paid to directors or related parties is scrutinised: must be at arm's length rates.
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What Income Tax Department (CBDT) says
Section 36(1)(iii) IT Act: interest on capital borrowed for business is deductible. Section 14A disallows interest (and other expenses) related to income that is exempt from tax (e.g., dividend income from subsidiaries). Transfer pricing rules (Section 92) apply to related-party loans. MSME Act: companies delaying payment beyond 45 days to MSME suppliers must report in MSME-1: interest not deductible. Interest paid to a resident other than a bank may attract TDS under Section 194A, and the deduction can be affected if TDS is not deducted. Interest paid to a director or shareholder must be supported by a loan agreement and the TDS compliance record.
When you can claim
- Interest on bank working capital loans (cash credit, overdraft)
- Interest on term loans for equipment, vehicles, and property
- Interest on business credit cards used for genuine business expenses
- Loan arrangement fees and processing charges (deductible over the loan tenure)
- Interest on unsecured loans from directors at market rate with proper documentation
When you cannot claim
- Interest on personal loans of promoters/directors not used for business
- Interest pre-commencement of business (capitalised to startup costs, then deductible in 5 equal instalments under Section 35D)
- Interest on loans for investments earning exempt income
Good to know
Pro tip: Interest paid to banks and NBFCs is straightforward. For shareholder or director loans, document the rate at or below market (SBI MCLR plus spread) and ensure a proper loan agreement. The IT department scrutinises related-party loans for thin capitalisation and transfer pricing compliance. Under MSME Act, if you delay payment to MSME vendors beyond 45 days, the interest liability is not tax-deductible.
Important: Which Act applies depends on the year. Income earned up to 31 March 2026 (FY2025-26, assessed in AY2026-27) is governed by the Income Tax Act, 1961. From 1 April 2026 the Income-tax Act, 2025 applies for tax year 2026-27, and its section numbers differ from the 1961 Act cited here. The TDS sections 192 to 194T are consolidated into sections 392 and 393, and the TDS rates and thresholds were retained.
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