# Interest on Loan for Capital Asset: Capitalise or Expense?

Interest on borrowings used to acquire a capital asset receives split treatment depending on when it is incurred.

## The Split

Period	Treatment	Provision
Up to date of put-to-use	Added to actual cost of the asset (capitalised). Depreciation will be claimed on this amount over the asset's life.	Section 43(1)
After date of put-to-use	Allowed as revenue expenditure in the year of accrual.	Section 36(1)(iii)

## Why the Split?

Interest incurred before the asset is ready to generate income is part of the cost of bringing the asset into existence — economically it should be capitalised. Once the asset starts being used, interest is a normal financing cost of the running business and is currently deductible.

## Trigger Point: 'Put to Use'

The pivot date is the date the asset is first put to use — not the date of purchase, installation, or trial-run.

Worked example

### Example 1

Example: Loan of Rs. 10,00,000 @ 12% taken on 1.4.PY to purchase machinery. Machinery installed on 1.7.PY and put to use on 1.10.PY.

Interest from 1.4 to 30.9 (6 months) = Rs. 60,000 → added to cost of asset under Sec 43(1).

Interest from 1.10 to 31.3 (6 months) = Rs. 60,000 → allowed as revenue expense under Sec 36(1)(iii).

⚠️ Common exam mistakes

Using the date of purchase or installation as the cut-off instead of the date of put-to-use.
Claiming the entire year's interest as revenue expense under Sec 36(1)(iii).
Capitalising the entire year's interest (including post put-to-use portion).
Confusing this rule with AS-16 / Ind AS 23 cut-offs (which use 'ready for intended use', a similar but distinct concept).

Bare-Act text Section 36(1)(iii) Proviso & Section 43(1) · Income-tax Act, 1961 · click to expand

Section 36(1)(iii): The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Interest on Loan Taken for Acquisition of Capital Asset

Worked example

⚠️ Common exam mistakes