Can you take a Loan from your Relatives to Buy a Property?

In this detailed blog, we will explore whether you can take a home loan from friends or relatives, its advantages and risks, the impact on income tax, and best practices to ensure a legally sound transaction.

Is It Legal to Take a Loan from Friends or Relatives?

Yes, borrowing from relatives or friends is legal in India, provided it follows specific rules. However, it is crucial to maintain transparency and documentation to avoid complications. Loans from family members or friends are considered unsecured loans, meaning there is no collateral involved.

A key point to note is that any cash loan from relatives exceeding ₹20,000 is prohibited under the Income Tax Act. Therefore, the transaction should ideally be through bank transfers, cheques, or digital payments.

Advantages of Taking a Loan from Relatives for Property Purchase

1. Lower or No Interest Rate

Unlike banks that charge interest, a loan from a family member may be interest-free or come with a lower interest rate, reducing the overall cost of borrowing.

2. Flexible Repayment Terms

Unlike a bank home loan, where EMI payments are fixed, a loan from a relative allows more flexible repayment schedules, depending on mutual agreement.

3. No Processing Fees or Prepayment Charges

Banks and financial institutions charge processing fees and penalties for early repayment. A home loan taken from friends or relatives usually comes without such extra costs.

4. No Credit Score Impact

If you take a loan from a bank, your CIBIL score is considered. However, borrowing from family does not impact your credit score.

Disadvantages & Risks of Taking a Loan from Relatives

1. Income Tax Implications

• If the loan amount is significant, the Income Tax Department may investigate the source of funds.
• There are tax implications if the loan is interest-free or if an interest rate lower than market standards is applied.
• Income tax on a loan taken from friends or relatives must be considered while filing returns.

2. Family Disputes

Borrowing money from close relatives can strain relationships, especially if there are delays in repayment or misunderstandings.

3. Lack of Legal Protection

Since an unsecured loan from relatives does not involve collateral, the lender has no legal protection in case of non-repayment.

4. No Tax Benefits

A home loan from a bank qualifies for deductions under Section 80C and Section 24(b) of the Income Tax Act. However, loans from relatives do not qualify for these tax benefits.

Tax Implications of Borrowing Money from Relatives

1. Is a Loan from a Relative Taxable in India?

A loan from a relative is not taxable, provided it is structured correctly and documented. However, if the loan is given interest-free, the Income Tax Department may treat it as a gift rather than a loan.

2. Interest-Free Loan from Relatives – Income Tax Considerations

• If the loan is interest-free, the tax authorities may assume it is a disguised gift and can impose taxes.
• It is advisable to charge a nominal interest rate to avoid suspicion from tax authorities.

3. Unsecured Loan from Relatives in Balance Sheet

If you are a business owner and record the loan in your balance sheet, ensure proper documentation to avoid scrutiny during audits.

4. Loan to Family Member – Tax Implications in India

• If you lend money to a family member, there are no direct tax implications unless interest is earned.
• If interest is earned, it must be declared as income from other sources and taxed accordingly.

5. If I Borrow Money from a Friend, Is It Taxable in India?

• If borrowed without interest, it is not taxable but must be properly documented.
• If borrowed in cash exceeding ₹20,000, it violates the Income Tax Act.

Best Practices for Taking a Loan from Relatives for Property Purchase

1. Use a Family Loan Application or Agreement

To avoid legal issues, draft a formal family loan application or agreement, mentioning:

• Loan amount
• Interest rate (if applicable)
• Repayment schedule
• Mode of repayment

2. Avoid Cash Transactions

An unsecured loan from relatives in cash exceeding ₹20,000 is not allowed under Indian tax laws. Always prefer digital transactions.

3. Pay a Nominal Interest Rate

Even if borrowing from a relative, charging a small interest rate can help avoid tax scrutiny.

4. Mention the Loan in ITR

If you are borrowing a large sum, disclose it in your Income Tax Return (ITR) to maintain transparency.

5. Maintain Proper Repayment Records

Ensure every repayment is documented through bank statements or written acknowledgments to avoid future disputes.

Conclusion

Taking a loan from friends or relatives to buy a property can be a cost-effective option compared to bank loans. However, it comes with tax implications, documentation requirements, and relationship risks.

To ensure a smooth transaction, follow best practices such as formal agreements, digital payments, and proper documentation. While a bank loan provides tax benefits and legal protection, borrowing from relatives offers flexibility and lower costs.

If you’re considering a home purchase, explore your funding options carefully. And for more insightful home-related tips, check out Housiey, your go-to platform for property insights.

Want to bring positivity to your home? Read our blog on “Money Plant Vastu” to learn how to attract wealth and prosperity! 

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