Imputed interest

Imputed Interest – Imputed interest is interest not actually received or paid in cash but calculated and included as income or expense for tax purposes. It is commonly applied to below-market or interest-free loans, especially between related parties, to prevent tax avoidance or shifting of income. Key Points: Ensures lenders report taxable income even if interest isn’t charged. Ensures borrowers may have to account for a deductible interest expense, even without cash payment. Often governed by tax authorities to prevent manipulation of income through interest-free arrangements. Example: A parent lends ₹10 lakh to their child at 0% interest. Tax authorities may calculate an imputed interest of, say, ₹50,000 based on prevailing market rates, which the parent must report as taxable income.