Loans and advances under Schedule III: related parties, capital advances and loans repayable on demand

The loans and advances note is where a company's money leaves the business without becoming an expense: an advance to a machinery supplier, a loan to a group company, a rent deposit, GST credit waiting to be used. Loans and advances under Schedule III Division I are split into a long-term and a short-term head, each with prescribed sub-heads, a good/doubtful sub-classification and a separate statement of amounts due from directors and their concerns. Since 2021 there is also a table in the additional regulatory information on loans to promoters, directors, KMPs and related parties that are repayable on demand or have no terms. This guide, part of our Schedule III guide, covers the format, the classification calls, a worked note and the links to sections 185 and 186 and CARO. Ind AS companies use Division II, where loans are financial assets — not covered here.

Loans and advances under Schedule III: the two heads and their sub-heads

Part I of Schedule III (Division I) prescribes these classifications. Whether an item is long-term or short-term follows the current asset definition in the general instructions — realisable within twelve months or the operating cycle — explained in current and non-current classification under Schedule III.

The gap in the lettering under L is deliberate. Sub-item (b), "Security deposits", was omitted from long-term loans and advances by the 2021 amendment, and "Security deposits" was inserted as item (ia) under other non-current assets. A rent or electricity deposit that will not come back within twelve months now belongs there, not in the loans note. Schedule III does not name security deposits under short-term loans and advances or other current assets; a deposit refundable within twelve months is usually shown separately, specifying its nature, under short-term loans and advances — others, or under other current assets.

Capital advances classification: always non-current

A capital advance is money paid for the purchase of property, plant and equipment or intangible assets before they are received — an advance to a machinery supplier, a builder or a software developer. ICAI's Guidance Note on Division I (Revised January 2022) makes two points:

• Capital advances are not part of capital work-in-progress, because Schedule III requires them to be disclosed under long-term loans and advances.
• They are non-current irrespective of when the asset is expected to be received. The company does not expect to get cash back; the advance turns into a non-current asset. So a capital advance for a machine due next month is still non-current.

Clear the advance against the purchase when the asset arrives. If the order is cancelled and a refund is due, it is no longer a capital advance but a recoverable advance, possibly doubtful.

Secured, unsecured, doubtful — and amounts due by directors

Both heads must be sub-classified as:

• (a) Secured, considered good;
• (b) Unsecured, considered good;
• (c) Doubtful.

The Guidance Note says each item of loans and advances should be sub-classified this way, and that the allowance for bad and doubtful loans and advances is disclosed separately for each category. A single "less: provision" line at the bottom of the note does not show which category it relates to.

Schedule III also requires that loans and advances due by directors or other officers of the company (alone or jointly with others), and amounts due by firms or private companies in which any director is a partner, a director or a member, be stated separately. Show it as a sub-note with previous-year figures.

"Loans and advances to related parties (giving details thereof)" is read with AS 18: the Guidance Note says the details are what AS 18 requires, and disclosures beyond AS 18 are not necessary. Keep the related party note and this line consistent — see related party disclosures under AS 18.

When an advance becomes an "advance in the nature of a loan"

The additional regulatory information and CARO both speak of "loans or advances in the nature of loans". A trade advance is not automatically outside that phrase. The Guidance Note on Division I (paragraph 8.9.3.2) gives the test:

• A normal advance against an order, in line with normal trade practice, is not in the nature of a loan.
• An advance far in excess of the value of the order, or outstanding for a period far in excess of the period for which such advances are usually given, may be in the nature of a loan to the extent of the excess.
• Where there is no trade practice, a useful guide is the time the supplier needs to execute the order — from buying the raw material to delivering the goods. An advance outstanding beyond that would normally be in the nature of a loan, unless there is evidence to the contrary.
• Interest is an indication, not proof: a stipulation for interest normally points to a loan, but some interest-bearing advances are still not in the nature of loans.

In small-company files the cases to look at are advances to group concerns booked as "advance to supplier" with no purchases against them during the year, and advances to directors' firms that sit unchanged across two balance sheets. The Balance Sheet line may stay under advances, but the excess counts in the regulatory table, in the CARO 3(iii) answer and in the section 185/186 analysis.

Loans to related parties disclosure: the repayable-on-demand table

Paragraph Y(iii) of the general instructions for the Balance Sheet, inserted in 2021, requires a disclosure where loans or advances in the nature of loans are granted to promoters, directors, KMPs and related parties (as defined in the Companies Act, 2013), severally or jointly with any other person, that are (a) repayable on demand or (b) without specifying any terms or period of repayment. The Guidance Note adds that the relationship is tested on the date of the loan, the amount is the balance at the balance sheet date, the figure is the gross amount before any allowance, and the table is given for the previous year too, separately for "repayable on demand" and "without specifying any terms". A format, with illustrative figures:

Read literally, the denominator is the total of all loans and advances in the nature of loans — to anyone, including staff loans and the loan-like excess of trade advances — not total loans and advances. The full list of regulatory items is in additional regulatory information under Schedule III.

Sections 185 and 186, in brief. Section 185(1) bars a company from giving loans, guarantees or security to its directors, directors of its holding company, their partners or relatives, and firms in which they are partners. Section 185(2) allows loans to "any person in whom any of the director of the company is interested" — including a private company of which a director is a director or member — only with a special resolution and if the borrower uses the money for its principal business activities. A private company is exempt from section 185 under G.S.R. 464(E) of 5 June 2015 if no other body corporate has invested in its share capital, its borrowings from banks, financial institutions or bodies corporate are less than twice its paid-up share capital or ₹50 crore (whichever is lower), and no default in repaying them subsists when the loan is given; since June 2017 it must also not be in default in filing its financial statements or annual return. ICAI's CARO Guidance Note (Revised 2022) still applies this exemption after section 185 was substituted in 2018. Section 186(2) limits loans, guarantees, security and investments to the higher of 60% of paid-up capital, free reserves and securities premium or 100% of free reserves and securities premium, unless a special resolution is passed; section 186(7) sets a minimum interest rate linked to government security yields; and section 186(4) requires the full particulars of loans given and their purpose in the financial statements — the Guidance Note repeats this under the loans head.

CARO 2020 paragraph 3(iii). Where CARO applies, the auditor reports on investments, guarantees, security and loans and advances in the nature of loans — amounts granted and outstanding, terms not prejudicial, repayment schedules, amounts overdue for more than 90 days, renewals to settle overdues and, under 3(iii)(f), loans repayable on demand or without terms. The CARO Guidance Note points out that 3(iii)(f) covers such loans to all parties, while the Schedule III table covers only promoters, directors, KMPs and related parties, so the two figures can differ. Reconcile them — see CARO 2020 clauses that are easy to get wrong.

GST credit, TDS, advance tax and other balances: where they go

The Guidance Note says other loans and advances include items in the nature of advances recoverable in cash or kind — prepaid expenses, advance tax, GST input credit receivable and the like — and they are long-term if not expected to be realised within twelve months or the operating cycle. A classification table for common ledgers:

Tax references in FY 2025-26 accounts are to the Income-tax Act, 1961; the Income-tax Act, 2025 applies from tax year 2026-27.

Worked example: the loans and advances notes for a private company

Example Pvt Ltd's trial balance at 31 March 2026 shows, among other ledgers: an advance of ₹8,00,000 to a machinery supplier; rent and electricity deposits of ₹4,20,000; a loan of ₹15,00,000 to XYZ Pvt Ltd, in which a director is a member, repayable on demand at 9% (special resolution under section 185(2) passed); staff loans of ₹1,80,000 repayable within the year, including ₹40,000 to the CFO; advances to suppliers of ₹6,75,000, of which ₹75,000 is doubtful and fully provided and ₹6,00,000 is paid to one supplier against an order of ₹2,00,000, with delivery due within three months; GST input credit of ₹2,40,000; prepaid expenses of ₹45,000; and an income-tax refund of ₹1,10,000 for an earlier year, not expected within twelve months. Figures are illustrative.

(i) Comprises a staff loan of ₹40,000 to the CFO, a key managerial personnel (previous year Nil), and a loan to XYZ Pvt Ltd, a private company in which a director is a member, repayable on demand, interest 9% a year, for its principal business activities. Amounts due by private companies in which a director is a member: ₹15,00,000 (previous year ₹10,00,000). Amounts due by officers of the company: ₹40,000 (previous year Nil). Security deposits of ₹4,20,000 are shown under other non-current assets.

The regulatory table needs the total of loans and advances in the nature of loans: the XYZ loan ₹15,00,000, staff loans ₹1,80,000, and the ₹4,00,000 by which the supplier advance far exceeds the order value — ₹20,80,000. The XYZ loan is 72.12% of that (₹15,00,000 ÷ ₹20,80,000). The CFO's loan has repayment terms, so it is not in the table, but it is in the officers line. The CARO 3(iii) working uses the same list of loans and loan-like advances, but CARO also asks for amounts granted during the year, so its figures will not simply equal ₹20,80,000. Director loans taken by the company are the mirror image and go to borrowings — see borrowings under Schedule III.

Before you sign: loans and advances tie-outs

• Capital advances are non-current and cleared once the asset is capitalised; none sit in CWIP.
• Security deposits are under other non-current assets, not long-term loans and advances.
• Every category is split secured / unsecured / doubtful, with the allowance shown against it.
• Directors, officers and directors' firms and private companies are stated separately, with previous-year figures.
• Trade advances tested for loan-like excess, and one list of loans and loan-like advances used for the regulatory table, the CARO 3(iii) answer and the section 185/186 workings (section 186 does not cover loans to employees).
• Board and special resolutions, the section 186 register and interest rate checked for every loan given.
• GST and income-tax balances classified by expected realisation, and advance tax offset against the provision for tax only where AS 22 requires it (enforceable right of set-off and intention to settle net).

Frequently asked questions

Sources

• Companies Act, 2013 — sections 185 and 186, and Schedule III, Division I, Part I, Notes L, M and R and paragraph Y(iii) (India Code, amended text)
• Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 8.7.6, 8.7.7, 8.8.5 and 8.9.3
• ICAI — Guidance Note on the Companies (Auditor's Report) Order, 2020 (Revised 2022 Edition), paragraph 3(iii)

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