Borrowing costs explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Interest on money borrowed to build a factory is part of the factory's cost while it is being built, and an expense afterwards. Ind AS 23 sets the rules for which assets qualify, which interest counts, how to compute it for a specific loan and for a pool of general borrowings, and the dates on which capitalisation starts, pauses and stops. This guide applies them to a fourteen-month factory build with a three-month break.
Capitalise borrowing costs that would have been avoided if the expenditure on a qualifying asset had not been made (paragraphs 8 and 10). For a specific loan, take actual cost less income on temporary investment (paragraph 12). For general borrowings, apply a weighted-average capitalisation rate to expenditure, never above the cost actually incurred (paragraph 14). Start when expenditure, borrowing cost and activity all exist; suspend during extended breaks in active development; stop when substantially all activities are complete (paragraphs 17, 20 and 22).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. The cost of the asset ends up in the fixed asset register, which is why this workings belongs with the discipline of books of accounts.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 5-7 | A qualifying asset is one that necessarily takes a substantial period to get ready; interest under the effective interest method, interest on lease liabilities and certain exchange differences are borrowing costs | Financial assets and quickly made inventories do not qualify (paragraph 7) |
| 8-10 | Capitalise directly attributable costs, expense the rest | The test is cost avoidable if the expenditure had not been made |
| 12-13 | Specific borrowing: actual cost less investment income on temporary investment | Deduct the income earned before the money is spent |
| 14-15 | General borrowing: capitalisation rate = weighted average of borrowing costs on all borrowings outstanding, excluding specific borrowings until the asset is substantially complete; capitalised amount cannot exceed cost incurred | Group or subsidiary level pool as appropriate (paragraph 15) |
| 17-19 | Commencement when expenditure, borrowing cost and necessary activities all exist; expenditure is net of progress payments and grants | Includes technical and administrative work before construction |
| 20-21 | Suspend during extended periods of suspended active development; not for substantial technical work or a necessary temporary delay | A contractor dispute halting work is a suspension |
| 22-25 | Cease when substantially all activities are complete; part-by-part for parts usable on their own | A steel mill is complete only as a whole; a business park part by part (paragraph 25) |
| 6(e), 6A | Exchange differences count as borrowing costs only to the extent they adjust interest, measured as in paragraph 6A | Capped at the difference between the cost of borrowing in the functional currency and in the foreign currency; later gains reverse the adjustment |
| 26 | Disclose the amount capitalised and the capitalisation rate |
Companies on AS follow our AS 16 guide; the standard is outlined in Ind AS 23 Borrowing Costs. Where a foreign currency loan is retranslated, the base rules are in Ind AS 21.
The method
- Confirm the asset is a qualifying asset (paragraph 7).
- Find the commencement date (paragraph 17).
- List expenditures by date, net of progress payments and grants (paragraph 18), and note the loan that funded each.
- Specific loan: interest for the capitalisation period less income on temporarily invested funds.
- General pool: weighted average expenditure x capitalisation rate; compare with the cost incurred.
- Remove suspension periods and stop at completion.
- Disclose the amount and the rate (paragraph 26).
Worked example
The entity and all figures in this example are invented for illustration. Interest rates are assumed, for arithmetic only.
Hooghly Plastics Limited builds a new factory, a qualifying asset. Work starts on 1 April of FY1, and the factory is ready for its intended use on 31 May of FY2, fourteen months later. FY1 is the financial year (1 April to 31 March) in which construction starts, and FY2 is the next. Commencement is 1 April: expenditure, borrowing cost and construction activity all exist from that day (paragraph 17). A dispute with the contractor halts active development from 1 August to 31 October of FY1, an extended suspension (paragraph 20).
Funding and spending in FY1.
- Specific loan: Rs 6,00,00,000 at 10 per cent drawn on 1 April and spent on the factory as follows: Rs 2,00,00,000 on 1 April, 1 July and 1 December. Unspent funds earn 6 per cent on temporary deposit.
- General borrowings (outstanding all year): Loan A Rs 4,00,00,000 at 9 per cent and Loan B Rs 6,00,00,000 at 12 per cent.
- General-funded expenditure: Rs 1,20,00,000 on 1 January and Rs 1,80,00,000 on 1 March of FY1.
- FY2: Rs 60,00,000 paid on 1 April from general borrowings; capitalisation ends on 31 May.
Step 1: specific loan, FY1 (paragraphs 12 and 13). Capitalisation runs for nine months (April to July and November to March; August to October is suspended).
| Item | Working | Rs |
|---|---|---|
| Interest for 9 active months | 6,00,00,000 x 10% x 9/12 | 45,00,000 |
| Income on unspent funds, April to June | 4,00,00,000 x 6% x 3/12 | 6,00,000 |
| Income on unspent funds, July | 2,00,00,000 x 6% x 1/12 | 1,00,000 |
| Income on unspent funds, November | 2,00,00,000 x 6% x 1/12 | 1,00,000 |
| Eligible cost | 45,00,000 - 8,00,000 | 37,00,000 |
The interest of Rs 15,00,000 for the suspended three months (6,00,00,000 x 10% x 3/12) and the Rs 3,00,000 earned on the Rs 2,00,00,000 unspent in that quarter both go to profit or loss (paragraph 21).
Step 2: capitalisation rate for general borrowings (paragraph 14). The specific loan is excluded. Rate = (4,00,00,000 x 9% + 6,00,00,000 x 12%) / 10,00,00,000 = (36,00,000 + 72,00,000) / 10,00,00,000 = 10.8 per cent.
Step 3: general borrowings, FY1. Weighted average expenditure = 1,20,00,000 x 3/12 + 1,80,00,000 x 1/12 = 30,00,000 + 15,00,000 = Rs 45,00,000. Cost = 45,00,000 x 10.8% = Rs 4,86,000. This is below the general borrowing cost actually incurred in FY1, Rs 1,08,00,000, so the ceiling in paragraph 14 is met.
Step 4: FY2, two months to 31 May. For the specific loan, interest is 6,00,00,000 x 10% x 2/12 = Rs 10,00,000, with no temporary investment income because the loan is fully spent. For the general pool, the expenditure to which the rate applies is the general-funded spend of 3,00,00,000, plus 60,00,000 paid on 1 April, plus the borrowing cost capitalised in FY1 of 41,86,000 (paragraph 18 treats the carrying amount including capitalised borrowing costs as a reasonable approximation): Rs 4,01,86,000. Cost = 4,01,86,000 x 10.8% x 2/12 = Rs 7,23,348, below the Rs 18,00,000 actually incurred on general borrowings in the two months.
Step 5: cessation (paragraph 22). Capitalisation stops on 31 May of FY2. Interest from 1 June goes to profit or loss.
| Summary | FY1 (Rs) | FY2 (Rs) |
|---|---|---|
| Specific loan, eligible (net of investment income) | 37,00,000 | 10,00,000 |
| General borrowings at 10.8% | 4,86,000 | 7,23,348 |
| Capitalised | 41,86,000 | 17,23,348 |
Total capitalised Rs 59,09,348. Expenditure of Rs 9,60,00,000 (6,00,00,000 + 3,00,00,000 + 60,00,000) plus Rs 59,09,348 gives a factory cost of Rs 10,19,09,348.
| Particulars (FY1) | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Capital work in progress: borrowing costs (45,00,000 + 4,86,000) | 49,86,000 | |
| Finance cost (profit or loss) (1,68,00,000 - 49,86,000) | 1,18,14,000 | |
| To Interest payable or bank (60,00,000 + 1,08,00,000) | 1,68,00,000 | |
| Bank | 11,00,000 | |
| To Capital work in progress: investment income deducted | 8,00,000 | |
| To Interest income (profit or loss), suspension quarter | 3,00,000 |
Check. Net capitalised in FY1: 49,86,000 - 8,00,000 = 41,86,000, equal to Step 1 plus Step 3 (37,00,000 + 4,86,000). The specific loan's FY1 interest of 60,00,000 is fully accounted for: 45,00,000 capitalised gross plus 15,00,000 expensed. The investment income of 11,00,000 is fully accounted for: 8,00,000 deducted and 3,00,000 in profit or loss.
Exchange differences as borrowing costs
If part of the loan were in a foreign currency, the exchange loss would be capitalised only to the extent it stays within the difference between the interest cost of a comparable rupee borrowing and the interest cost of the foreign currency loan (paragraph 6A(i)). If a later gain arises on the same borrowing, it is taken as an adjustment to interest to the extent of the loss previously treated that way (paragraph 6A(ii)). Anything beyond that is an ordinary exchange difference under Ind AS 21.
Presentation and disclosure
Capitalised borrowing costs are part of the asset's cost, shown in property, plant and equipment or capital work in progress; see PPE under Ind AS 16. Paragraph 26 requires the amount capitalised in the period and the capitalisation rate, here 10.8 per cent for the general pool.
Common mistakes
- Starting capitalisation at the date of the loan rather than when expenditure, interest and activity all exist.
- Forgetting to deduct temporary investment income on a specific loan (paragraph 12).
- Including the specific loan in the weighted-average rate (paragraph 14).
- Capitalising during an extended suspension (paragraph 20).
- Capitalising more than the borrowing cost actually incurred (paragraph 14).
- Continuing to capitalise after the asset is ready, because "final bills are pending" (paragraph 23).
Need help with capitalisation workings?
Capitalised interest is audited line by line, and a missing suspension or a wrong rate will unwind a year's work. Our team can prepare the expenditure schedule, rate computation and entries as part of books of accounts support, so the cost of each project is defensible.
Key takeaways
- A qualifying asset takes a substantial period to get ready.
- Specific loans: actual cost less temporary investment income.
- General loans: weighted-average rate on expenditure, never above cost incurred.
- Capitalise from commencement, pause in extended suspensions, stop at substantial completion.
- Disclose the amount and the rate.
Read next
- Property, plant and equipment under Ind AS 16: components, revaluation and decommissioning
- ITFG clarifications on Ind AS 12, 16, 23 and 38: deferred tax, capitalisation and borrowing costs
- Foreign currency under Ind AS 21: functional currency and translation
- AS 16 Borrowing Costs for non-Ind AS companies
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.