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Loans from family members or friends are not taxable. Whether the loan is with or without interest, it becomes tax-free for the borrower. However if the lender charges interest from the borrower, he or she has to pay taxes on any interest that is earned from the loan.
To regulate personal loans from friends and relatives government has made certain rules and regulations and also implemented various restrictions. They are as follows:
With becoming cashless it is now very easy to transfer money to other people through phone. This is done through UPI, e wallets and so on. Even the debts of friends can be cleared through e wallets.
For example: If you go out with six friends on a trip and you spend the complete expenditure with the total amount of Rs 35,000. Afterwards, your friends pay their share through an app or UPI giving you back a total amount of Rs 30000. These transactions will be taken as gifts and will not be taxed. As this transaction will be settlement of the debts owed to you and it is tax-free.
The amount should not exceed the sum of 50,000. Any bigger amount transferred by friends through e-wallets will be taxable.
Interest repayment for a home loan that is taken from friends or relatives can be claimed as a deduction under section 24. The deduction can only be claimed when the construction of the house is complete or the possession is received by the individual. The income tax act does not specify clearly that deduction will be available only for loans from specified banks.
On the other hand repayment of the principal on a home loan borrowed from friends or relatives can’t be claimed as a deduction under this section.
For Example:
“Mr. A purchases a house for Rs 10 lakh. He took this loan from his relative Mr. V for the purchase of this property. The loan is repayable in 10 equal installments with an interest of Rs 5% per annum. He repaid the principal of Rs 1 lakh and an interest of Rs 50000 for the financial year 2021-22.”
“Mr. A is eligible for a deduction under Section 24 for interest repayment of Rs 50000. But he can’t claim a deduction under Section 80C for the principal repayment as the deduction is not available for the repayment of the loan from friends or relatives.”
From the above discussion, it can be seen that even for simple things such as personal loans that are received or given to friends or relatives, there are various restrictions and regulations that everyone should be aware of.
No, loan from friends or relatives is tax-free. No borrower is taxable for any sort of loan. However, such loans should not be in cash as discussed above.
The lender of the loan if charges interest from friends or relatives is liable to pay tax on the interest earned.
Yes, any person can make an interest free loan or loan on a subsidised rate to friends or relatives however, such loan should not be granted or recollected as cash . The transaction must be through a bank account in various ways such as payee cheque, electronic transfer, bank draft and so on.
When a loan is given to any friend or family member, it may be given with a relaxed rate of interest; however, any interest charged by the lender of the loan from friends or relatives is liable to be taxed and the lender should pay tax on the interest earned.
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