Loans From Friends And Family Subject To TDS And Other Income Tax Provisions

If you have taken a loan from friend or family, or given one to them, and are paying or earning interest on the loaned amount, then you need to comply with the income tax rules, too
Loans From Friends And Family Subject To TDS And Other Income Tax Provisions

At times, one may consider taking a loan from friend or family or within such close circle rather than approach a bank or a third party lender.

While there is nothing illegal in doing so, the cash limit of the loan needs to be considered, according to Gaurav Makhijani, senior tax advisor, Roedl and Partner, a tax consultancy firm.

Also, he advises that people create a loan agreement in writing for future reference should the income tax department demand to see one in the future, as well as to avoid any disputes among the involved parties at a later date.

Here are some things to keep in mind while taking loans from friends and family

Cash Transaction Limits Are Up To Rs 20,000

According to Section 269SS of the Income-tax Act, 1961, no person shall take or accept such loan/ deposit/specified sum from any other person than otherwise by an account payee cheque or account payee bank draft or electronic clearing system through a bank or through other prescribed electronic mode for sums above Rs 20,000. 

Abhishek Y. Bhavsar, an Ahmedabad-based chartered accountant, says that the term specified sum here means any sum of money receivable, whether as advance or otherwise, in relation to transfer of an immovable property, irrespective of whether the transfer takes place or not.

Cash Limits Not To Be Checked If Both Persons Earn “Only” Agricultural Income

Bhavsar says that these rules, however, do not apply “in cases where the person from whom the loan or deposit or specified sum is taken or accepted, and the person by whom the loan or deposit or specified sum is taken or accepted, are both having agricultural income, and neither of them has any income chargeable to tax the Act.”

So, in essence, if one is earning only agricultural income, and the person to whom the loan is being given is also earning only agricultural income, then the cash transaction limit of Rs 20,000 does not apply. But in every case, they apply.

Create A Loan Agreement And Get It Notarised

Bhavsar advises people to create a specific documentation schedule for undertaking such a loan transaction in order to formalise it. The loan agreement should be stamped or notarised, or, the lender and borrower can also execute the loan contract by way of a promissory note if they so wish.

“It is also pertinent to note that appropriate stamp duty shall be levied while executing the above instruments,” Bhavsar says.

Borrower Will Deduct TDS If Lender Charges Interest Above Specified Limit

If the lender is charging an interest, then that income will be charged under the head income from other sources for the lender, and the borrower will also deduct TDS at 10 per cent, if the interest consideration is above Rs 5,000. 

Makhijani says that if the borrower is an individual or a Hindu undivided family (HUF), then he/she will be required to deduct TDS on interest payment only, if the business income is more than Rs. 1 crore, or professional income is more than Rs. 50 lakh in the year preceding the concerned financial year.

Borrower Can Claim Deductions On Such Interest, But Only In Certain Cases

This would arise when the concerned loan was taken for purchasing a house property and where the borrower is paying an interest to the lender.

Bhavsar says that the interest payment can be claimed under the head ‘Income from house property’ in accordance with the limits and conditions as prescribed u/s 24(b) of the Income-tax Act, 1961.

If someone has taken the loan for their business or profession (doctor, others), then the interest can be claimed as an expense under the head ‘profits and gains of the business or profession’.

“Only if the said loan has been wholly and exclusively utilised for the purposes of the business or profession and the same is not covered in the Act, then it will be allowed,” Bhavsar says.

He adds that in certain cases, interest paid on loans can also be deducted against income from other sources.

“The interest paid towards loan availed for personal purposes cannot be claimed, unless the same is specifically covered under any of above scenarios or under any other provisions of the Act,” he says.

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