## Capitalization Rate for General Borrowings
### Why a Capitalization Rate Is Needed
When a qualifying asset is financed by general borrowings (loans taken for multiple purposes, not earmarked for one asset), you cannot directly trace which rupee of interest belongs to which asset. The solution is a Capitalization Rate (Cap Rate) — the weighted-average interest rate across all general borrowings outstanding during the period. This rate is then applied to the expenditure incurred on each qualifying asset.
### Formula
```
Cap Rate = (Σ Interest on General Borrowings) × 100
────────────────────────────────────
(Σ Time-Weighted General Borrowings)
```
Both numerator and denominator are time-weighted — each loan is scaled by the fraction of the year it was outstanding.
### Step-by-Step Process
Step 1 — Weighted Average Total Interest (Numerator)
For each general borrowing:
```
Interest = Principal × Annual Rate × (Months Outstanding / 12)
```
Sum all such amounts.
Step 2 — Weighted Average Total Borrowings (Denominator)
For each general borrowing:
```
Weighted Principal = Principal × (Months Outstanding / 12)
```
Sum all such amounts.
Step 3 — Compute Cap Rate
```
Cap Rate = Step 1 / Step 2 × 100 (express as %)
```
### Key Rules
- Specific borrowings are excluded from both numerator and denominator — they are handled separately.
- If there is only one general borrowing, the cap rate equals that loan's stated annual rate; no weighted average is needed.
- The cap rate is an annual rate. When applying it to expenditure on a qualifying asset, multiply by the appropriate time fraction (Months / 12).
- The cap rate should not exceed the actual borrowing cost incurred — you cannot capitalize more interest than was actually paid.