In this article, you will know about deduction available for interest and principal on the home or auto loan is taken from friends or relatives and for now, we will discuss the deduction on housing loan. On housing loan, the maximum deduction of tax is 2 lakh but if the interest paid is less than 2 lakh then the deduction for the amount will be available. It is also available if you just take the loan only for renovating or repairing your home and is restricted to Rs. 30 thousand. The interest repayment of the deduction is only paid when your home is totally constructed or repaired and once you will get the possession. There are two types of loans that we can take from our relatives i.e. official loan and unofficial loan. No one can claim the amount of interest repaid until the completion of construction of your home as the repayment of interest starting from the month in which loan is taken
According to the Income Tax Act, it does not specify that for deduction you should take a loan from any specified banks. If you are purchasing a home or starting a construction of your new home, you can claim a deduction of Rs. 1.5 lakh for repayment of the principle of the loan and this payment will be inclusive of all deductions like PPF, EPF, ELSS etc but the condition is that you should take the loan from any bank, LIC or any other registered lenders.
However, if we talk about an official loan from friend or relative then you can draw up a legal document clearly which defines all the terms and conditions of the loan and with this, you can assure your relative or friend that you will return his money and with this, your relationship will not be disturbed. You can do this in two ways either by a promissory note or by the detailed loan agreement. The promissory note is just an acknowledgment that you will pay back the amount of loan but it is advisable to enter into a loan agreement which is helpful for both parties. And if we talk about gifts received or taken from relatives then they are not taxable but if you have received more than 60, 000 then you have to pay tax for it however, if you have taken this as a loan then there is no need to pay any tax for that amount as interest free loans are non-taxable for both lenders and borrowers but lender will have to pay the tax on the interest received from the borrower.
The unofficial loan means that if you take a loan from your friend or relatives, you can’t claim repayment of principal on loan as a deduction. A loan taken from a friend or relative is an unsecured loan as the terms and conditions are under defined and in that case, payback is risky and if you are not able to pay back the loan to your friend or relative then relationship also sours. So this is the reason that majority of the people ignore to give financial help to their close ones.