The specific-loan working starts with actual costs, not a general pool rate
Ind AS 23 paragraph 12 determines eligible costs for funds borrowed specifically for a qualifying asset as actual borrowing costs for the period less income from temporary investment of those borrowings. Paragraph 13 explains why income earned while those funds await asset expenditure is deducted. A general-borrowing weighted rate is a different calculation. Read Ind AS 23 paragraphs 10–14.
This guide concerns entities applying Ind AS and was checked on 25 October 2026 against ICAI’s 2025–26 compendium. It isolates specific borrowing and temporary-investment tracing, rather than repeating the general-borrowing pool or foreign-exchange adjustment models. Income-tax treatment and restrictions on using loan proceeds require their own review.
A project loan label does not establish a qualifying asset
Paragraph 5 requires an asset that necessarily takes a substantial period to become ready for its intended use or sale. Assets ready for use when acquired and financial assets are not qualifying assets merely because financed by a loan. Establish the asset and directly attributable borrowing before computing capitalisation. Consider the standard’s scope exceptions for the actual facts.
Use actual borrowing costs measured under the relevant standards. A coupon rate alone may not equal effective-interest expense under Ind AS 109 where fees or other adjustments matter. The simple interest models below assume the stated cost equals the properly determined actual borrowing cost; they do not replace an effective-interest schedule for a different loan.
Trace investment income to the specific borrowed funds
Create a loan-to-bank-to-investment-to-project bridge. Identify the proceeds temporarily invested pending qualifying expenditure, the investment period and gross income earned. Do not subtract unrelated operating cash interest simply because it appears in the same bank account. Conversely, do not omit relevant income because the project manager considers it a treasury profit outside the construction budget.
Use investment income, not merely the net bank credit after withholding. Where gross income is reduced by tax withheld, reconcile gross income, withholding and net cash separately. This is a financial-reporting amount distinction, not a conclusion about the applicable TDS rate or income-tax deductibility.
Apply commencement, suspension and cessation before finalising the amount
Paragraph 17 requires asset expenditure, borrowing costs and activities necessary to prepare the asset for use or sale before capitalisation begins. Technical and administrative preparation can count under paragraph 19; simply holding land without development does not. A loan drawn before the necessary conditions are met does not make all interest from drawdown eligible automatically.
Paragraphs 20–21 suspend capitalisation during extended suspension of active development, while distinguishing substantial technical work and necessary process delays. Paragraphs 22–24 stop capitalisation when substantially all preparation is complete, including a separately usable completed part in the stated circumstances. Do not prolong capitalisation until the last administrative file closes or until the loan is repaid.
Keep the capitalised asset bridge separate from cash financing
Reconcile total borrowing cost, ineligible-period expense, relevant temporary-investment income and the resulting capitalised amount. After a specifically financed asset is ready, the treatment of continuing borrowing within a general pool requires paragraph 14’s separate analysis. Do not count the same financing cost in both the specific working and a general-rate calculation.
Paragraph 26 requires disclosure of borrowing costs capitalised and the capitalisation rate used. Also consider impairment or net-realisable-value requirements where relevant; eligibility to capitalise does not guarantee recoverability of the asset. Common errors are using net investment receipts, subtracting unrelated interest, capitalising during an unsupported suspension, and retaining specific-loan costs twice in a combined model.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Full-period specific loan
Assume a qualifying asset and all capitalisation conditions hold throughout the model year. Specific borrowing is ₹1,00,00,000 with correctly measured actual cost equivalent to simple 10% annual interest, ₹10,00,000. Relevant temporary-investment income is ₹2,00,000. Eligible capitalisation is ₹8,00,000.
Illustrative example 2: Two drawdown tranches
Assume both tranches specifically finance the same qualifying asset during eligible periods. ₹60,00,000 at simple 10% for twelve model months contributes ₹6,00,000; ₹40,00,000 at 12% for six model months contributes ₹2,40,000. Actual model cost is ₹8,40,000. Deducting relevant investment income of ₹90,000 gives ₹7,50,000. Monthly fractions are stipulated modelling assumptions.
Illustrative example 3: Exclude unrelated investment income
Actual eligible-period specific cost is ₹6,00,000. Relevant temporary-loan investment income is ₹1,00,000 and unrelated operating-fund income is ₹50,000. Deduct ₹1,00,000, producing ₹5,00,000 eligible capitalisation. Subtracting both income amounts would understate this model by ₹50,000.
Illustrative example 4: Extended suspension
Assume ₹9,00,000 annual actual cost accrues evenly over twelve model months and three months are established to be an extended suspension requiring cessation of capitalisation for that interval. Excluded cost is ₹2,25,000; eligible-period cost is ₹6,75,000. Relevant investment income attributable to the eligible period is ₹25,000, leaving ₹6,50,000 capitalised. The excluded interval’s income, if any, requires separate period accounting.
Illustrative example 5: Stop when preparation is substantially complete
Assume all necessary activities are substantially complete on 30 September and the annual actual borrowing cost of ₹8,00,000 accrues evenly across twelve model months. Eligible six-month cost is ₹4,00,000. Relevant eligible-period temporary-investment income of ₹25,000 reduces capitalisation to ₹3,75,000. The remaining six-month borrowing cost of ₹4,00,000 is not capitalised to this completed asset merely because the loan continues.
Illustrative example 6: Gross income versus net receipt
Eligible-period borrowing cost is ₹7,00,000. The relevant investment earns ₹1,00,000, with a stipulated ₹10,000 withheld and ₹90,000 net credited. Deduct gross income of ₹1,00,000 to capitalise ₹6,00,000. Using net cash would produce ₹6,10,000 and overstate capitalisation by ₹10,000; no statutory withholding rate is asserted here.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the asset | Qualifying-asset assessment and intended use or sale. |
| 2 | Identify specific financing | Loan terms, purpose and proceeds trace. |
| 3 | Measure actual costs | Relevant effective-interest or other valid borrowing-cost schedule. |
| 4 | Establish commencement | Expenditure, costs and necessary preparation activities. |
| 5 | Review interruptions | Evidence distinguishing extended suspension from necessary delays. |
| 6 | Establish completion | Substantially complete asset or independently usable part. |
| 7 | Trace temporary investments | Borrowed-fund source, placement and eligible-period income. |
| 8 | Reconcile gross income | Gross earnings, withholding and net bank credit. |
| 9 | Prepare the cost bridge | Actual cost, expense exclusions, relevant income and capitalised amount. |
| 10 | Complete closing review | No double inclusion, required disclosures and recoverability analysis. |
Sixteen practitioner FAQs
1. Does a project-loan label automatically permit capitalisation?
No. Establish a qualifying asset and the recognition conditions.
2. What is a qualifying asset?
An asset necessarily taking a substantial period to become ready for intended use or sale under the standard.
3. What does paragraph 12 use for specific funds?
Actual borrowing costs less relevant temporary-investment income.
4. Is the general weighted rate the same calculation?
No. Paragraph 14 addresses general borrowings separately.
5. Can the coupon always substitute for actual cost?
No. Effective-interest or other applicable measurement may differ; the examples expressly assume simple actual-cost models.
6. Why deduct temporary-investment income?
Paragraphs 12–13 require it for the relevant borrowed funds awaiting expenditure.
7. Can all company bank interest be deducted?
No. Trace the income to the specific borrowed funds and relevant period.
8. Should net cash after withholding be used?
Use the relevant gross investment income and reconcile withholding separately.
9. Does drawing the loan start capitalisation by itself?
No. Paragraph 17 requires the stated expenditure, borrowing-cost and preparation conditions together.
10. Can technical preparation count before construction?
Yes, where it meets paragraph 19; mere passive holding does not automatically qualify.
11. Is every temporary pause a suspension?
No. Apply the distinctions in paragraphs 20–21 to the actual work and delay.
12. Does capitalisation continue until loan repayment?
No. Apply the substantially-complete preparation test.
13. Can routine late administrative work extend the period?
It does not automatically prevent completion under paragraph 23.
14. Can an independently usable completed part matter?
Yes. Paragraph 24 addresses cessation for such parts.
15. May the same cost appear in specific and general workings?
No. Reconcile the financing to prevent double capitalisation.
16. Does capitalisation eliminate impairment review?
No. Recoverability and the required borrowing-cost disclosures remain separate closing matters.
Conclusion
For a qualifying asset financed by specific borrowings, Ind AS 23 uses actual borrowing costs less income from temporarily investing those borrowed funds. Establish the capitalisation period, trace the funds and use gross relevant investment income rather than the net bank receipt after withholding.