The partnership deed provides for Interest on capital @ 5% p.a. What…

Based on following, answer the question.

Mr. A, Mr. B and Mrs. C are friends, graduated from JIM Calcutta with specialisation in finance. They started a financing business as a partnership firm. In a written Partnership Deed they specify that the profit sharing ratio amongst them would be 3 : 2 : 1 and interest on capital would be provided @ 5% p.a. However no specifications were made in partnership deed about the interest on drawings and loans. The capitals contributed by them were ₹3,00,000, ₹2,00,000 and ₹1,00,000 by A, B and C respectively. During the year Mrs. C withdrew ₹20,000 to meet her family expenses. Looking at insufficient capital Mr. B introduced another ₹1,00,000 as capital into the firm on 1^st June 2021. The business was expanding and for the same purpose the firm took a loan from Mr. A of ₹3,00,000 on 1^st October 2021. During the year ended 31 March, 2022 firm earned a profit of ₹4,00,000 before charging rent of ₹20,000 p.a. Looking at the competency of Mr. D being a C.A. Mr. B wanted to introduce him in the partnership firm as a partner. The firm started its operation on 1^st April 2021.

The partnership deed provides for Interest on capital @ 5% p.a. What would be the amount of interest on capital credited to Mrs. C?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → ₹5,000

Interest on capital is allowed at the agreed rate on the capital for the period it stayed in the business. Mrs. C's capital of ₹1,00,000 was in the firm for the whole year; her drawings are not a withdrawal of capital.

Interest on capital = ₹1,00,000 × 5/100 = ₹5,000

NCERT (2026-27 edition):
Interest on Capital – “No interest is allowed on partners’ capitals unless it is expressly agreed among the partners. When the Deed specifically provides for it, interest on capital is credited to the partners at the agreed rate with reference to the time period for which the capital remained in business during a financial year.”