Tax on pooled money

[Sakshi_Shah1]

@HIREiN

is there any upper cap limit for the interest payment .
i think , we are not allowed to deduct interest more than 24% p.a.

what if my profit sharing comes to 5% per month of the capital borrowed ; will that also be allowed as interest on loan ?

Like we mentioned earlier, if there is a profit sharing model, it must be done through creating a separate entity and not through an individual’s account.

There is no limit on the interest payment on loans in the case of an individual. However, it should be as per the market rates and not unreasonable. The Assessing Officer will disallow the expense if it is unreasonable or not genuine.

[Sukanta]

@Sakshi_Shah1

Like we mentioned earlier, if there is a profit sharing model, it must be done through creating a separate entity and not through an individual’s account.

Thank you again @Sakshi_Shah1 for replying to the questions.
Lets assume, I am a very good trader and I made say 60% return, but according to my contract with my friends, I have to return them 80% of the profit, i.e. 48%. In this case, will it be considered as a valid loan interest? what is the market rate?
If it is not as per market rate, then if you could tell how to create a separate entity to handle pooled money, that will be of great help.

[Sakshi_Shah1]

@Sukanta

Thank you again @Sakshi_Shah1 for replying to the questions.
Lets assume, I am a very good trader and I made say 60% return, but according to my contract with my friends, I have to return them 80% of the profit, i.e. 48%. In this case, will it be considered as a valid loan interest? what is the market rate?
If it is not as per market rate, then if you could tell how to create a separate entity to handle pooled money, that will be of great help.

Hi @Sukanta

It is difficult to justify such a high rate of interest if you’re doing all the trading activity from an individual’s account. The market rate usually lies between 12% to 18% per annum.

You may register a partnership firm and open a Demat account in the name of the firm. The trading activity can be done from this account and the relevant profits as per the profit-sharing ratio can be distributed amongst the partners.

[delta]

It’s a very good set of questions asked and relevant also but it went unanswered.

Is it mandatory to do agreement on stamp paper and notary stampified or agreement on A4 paper can be acceptable if asked by AO later

[Surbhi_Pal]

Hey @delta,

The question has been answered here.

@Sakshi_Shah1

Relevant proofs for claiming business expenses could be in form of invoices, bills etc for daily expenses, agreement for rent expense, challans for tax payments, broker statements for trading expenses etc.

@Sakshi_Shah1

If there is profit sharing, it should rather be done through a separate entity and not through an individual’s account. However, if the money is borrowed, you should report is as a loan received. On repayment of the money, it should be reported as loan repaid and the interest on such loan can also be claimed as an expense. Bank entries for these transactions is a documentary proof. You can also provide a confirmation of account statement duly signed by both the parties as a proof to the AO if asked for.

Kindly elaborate on your query if this does not clarify the same.

[HIREiN]

@Sakshi_Shah1

hrough a separate entity and not through an individual’s account.

individual saving bank account not allowed ! is HUF bank account also not allowed ?

[delta]

Thank You,
If all the transactions were done through online banking mode, apart from that Is it must to have separtely Stamp paper agreement or some written agreement before taking loan taken from friends/family members?

If that way of borrowing money is not problematic then isn’t the lot easier way to take loans and then claim the Interest paid using section 36(1), it’ll also help the friend to have more income, rather than running to banks for loans?

[Vic]

Hello,

I have been trading for a few months now with about 6L in my brokerage account. Things are going good so far. I am looking to put more money into my demat account. I would like to know if I can take money from my uncle say about 15Lacks and put it in my Zerodha account. He is willing to give it to me as a gift. Can you tell me if this is possible? Will i get any notices after putting so much extra money in my trading account?

Would appreciate if you can answer this. Thank you

[CA_Jayni_Bhavsar]

Hey @Vic

If you receive money from relatives, it will be classified as a gift, and there won’t be any tax obligation associated with it. Therefore, in your situation, accepting money from your uncle as a gift would not incur any tax liability. However, you need to report this amount as an exempt income while filing the income tax return.

Hope this helps!