Explain the features of Interest.

Answer: Interest is the return paid by the company to its lenders (debentureholders, depositors, banks) on borrowed capital. Its features are:

1. Return on borrowed capital: It is paid to creditors and not to owners of the company.
2. Fixed rate: It is paid at a pre-determined fixed rate on the face value of debentures or amount of loan.
3. Compulsory payment: It must be paid at regular intervals (half-yearly or yearly) whether the company makes profit or loss.
4. Charge against profit: It is a charge on profit, i.e. an expense debited to profit and loss account, and is paid before dividend.
5. Tax deductible: Interest is an allowable expense, so it reduces the taxable income of the company. Tax is deducted at source (TDS) at the time of payment.
6. Legal obligation: If interest is not paid, the lenders can take legal action and, in case of secured debentures, enforce the security through the trustees.
7. Mode of payment: It is paid by interest warrant or by electronic transfer (ECS/NEFT) to the lender's bank account.