What is true in respect of interest on Partner's capital?

Both 1 and 2 are correct

The correct answer is option 3- Both 1 and 2 are correct.

Option 1- In the absence of partnership deed, no interest is payable on the capitals of partners. THIS IS CORRECT. No partner is entitled to claim any interest on the amount of capital contributed by him in the firm as a matter of right. However, interest can be allowed when it is expressly agreed to by the partners. Thus, no interest on capital is payable if the partnership deed is silent on the issue.

Option 2- If there is any provision relating to interest on capital in the partnership deed, such interest on capital will be payable only if there is profit in the firm. THIS IS CORRECT. The interest on capital is allowed only when the firm has earned profit during the accounting year. Hence, no interest will be allowed during the year the firm has incurred net loss and if in a year, the profit of the firm is less than the amount due to the partners as interest on capital, the payment of interest will be restricted to the amount of profits. In that case, the profit will be effectively distributed in the ratio of interest on capital of each partner.

Hence, both option 1 and 2 are correct.