Interest on Capital is allowed on which capital to a partner in a partnership firm?

Capital remain invested in the business

The correct answer is option 4- Capital remain invested in the business.

Interest on capital is to be calculated on the capitals at the beginning for the relevant period. If there is any additional capital introduced or capital withdrawn during the year, it will cause change in the capitals and interest is to be calculated proportionately on the changed capitals for the relevant period. So, ultimately interest is calculated on the capital that remains invested in the business. 

Other Options:

Option 1, Average capital, is not always suitable because average capital is only one possible method used for convenience in some cases and is not the fundamental basis for allowing interest.

Option 2, Opening capital, is also not fully correct because if there are additional capital contributions or withdrawals during the year, calculating interest only on opening capital would ignore those changes.

Option 3, Closing capital, is incorrect because closing capital includes the effect of profits, drawings, and other adjustments made at the end of the year, whereas interest on capital is based on the capital employed during the year.