Sometimes, a person may think of taking a loan from a friend or family member or within a close circle rather than approaching a bank or other lender.

While there is nothing illegal in doing so, the loan amount limits need to be considered, according to Gaurav Makhijani, senior tax advisor, Roedl and Partner, a tax consultancy firm. the tax.

Also, he advises that people create a written loan agreement for future reference in case the Income Tax Department demands to see it in the future, and also to avoid future disputes between the parties.

Here are some things to keep in mind when borrowing from friends and family

The cash transaction limit is 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 amount from any other person except through ‘the taxpayer’s account statement or bank draft or electronic clearing system through the bank or through other prescribed electronic means for amounts exceeding Rs 20,000 .

Ahmedabad-based Chartered Accountant Abhishek Y. Bhavsar says that the term ‘money’ referred to here means any money received, either in advance or otherwise, in connection with the transfer of immovable property, regardless of the transfer or not. .

Income limits should not be considered if both earn “only” agricultural income

Bhavsar said that these rules, however, do not apply “if the person from whom the loan or deposit or specified amount is received or accepted, and the person from whom the loan or deposit or specified amount is received or accepted . have agricultural income, and none of them have taxable income under the law.”

Therefore, in general, if a person earns income only from agriculture, and the person to whom the loan is given only earns from agriculture, it does not apply the transaction limit of Rs 20,000. But in all cases they apply.

Create a loan agreement and get it notarized

Bhavsar advises people to create a schedule of documents specific to making such a loan to confirm it. The loan agreement should be stamped or notarized, or, the lender and the borrower can execute the loan agreement by means of a promissory note if they wish.

“It is also necessary to note that the corresponding stamp duty is imposed on the execution of the above instruments,” said Bhavsar.

The lender will deduct TDS if the borrower pays interest above the specified limit

If the borrower pays interest, that income will be charged under the borrower’s income from other sources, and the borrower will deduct 10 percent. of TDS, if the interest consideration exceeds Rs 5,000.

Makhijani said that if the borrower is an individual or a Hindu Undivided Family (HUF), he will be required to deduct TDS on interest payments, if the company’s income exceeds Rs. 1 crore, or professional income exceeds Rs. 50 lakh in the year preceding the relevant financial year.

Borrowers can claim a deduction for such interest, but only in certain circumstances.

This happens when the loan is taken out to buy a house and where interest is paid to the lender.

Bhavsar said that the payment of interest can be claimed under the head ‘income from real estate’ as per the limits and conditions mentioned u/s 24(b) of the Act. of Income Tax, 1961.

If someone took the loan for business or work (doctor, other), the interest can be reported as an expense under the heading ‘profits and profits from business or work’.

“If this loan is used entirely and exclusively for the purposes of the business or work and is not covered by the law, then it is allowed,” said Bhavsar.

He added that in some cases, the interest paid on the loan can be deducted from other income.

“The interest paid on loans that can be used for special purposes cannot be claimed, otherwise it is specifically covered in the above circumstances or under other provisions of the law, ” he said.

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