Yes — Fully Claimable

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.

Typical claim: INR 50,000 to INR 30 lakh per year depending on debt level; 8-14% typical lending rates

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.

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.

Source: Income Tax Department (CBDT)

Related expenses

Professional and Consultancy Fees
Depreciation on Business Assets

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