How to show borrowed money in income tax return?

There are many rules and laws which we might not quite be aware of. Even if you are borrowing money from your friends or family, there are certain rules defined for the same by the Government. I am going to share insights on how to show borrowed money in Income Tax Return and other important points to remember along with it.

There are a few rules which you must know about before indulging in any such transfer. Let me take you through them:

• Any transaction above Rs. 20000 in a financial year must not be done in cash. You can do so by writing a cheque, bank draft or electronic transfer through a bank account. The rule applies if you are giving or repaying a loan.

• The violation of above rule is recorded under Section 269T of Income Tax Act and can attract penalty to the extent of 100% of the amount transferred.

• Although borrowing or lending money is not taxable, gaining interest from the same is taxable as per the government. If you earn interest, you will have to show it as ‘Income from other sources.’

• Since you asked how to show borrowed money in ITR, this one is important for you. You can claim tax benefit on principal and interest paid on the borrowed money to your friend under section 24 and not under section 80C.

• Make sure to have all the documents handy in case of any enquiries by the tax authorities to support your claim

• If you are borrowing money from NRI or a person of Indian origin, the loan amount should not exceed $250000 in a financial year and it should be taken for at least a year without any interest.

This all you need to know about how to show borrowed money in income tax return. I hope this resolves your query.

People frequently ask friends and family for assistance while facing financial difficulties. Due to a job loss during the COVID, my brother experienced financial difficulties and had to make mortgage payments. Therefore, He borrowed a loan from my uncle. He asked me to check how to show borrowed money in ITR. I researched online and found that borrowing from or lending to family or friends is not a taxable transaction. 

How to show loan amount in ITR?

The borrowed money is not regarded as taxable income. Gayatri has already mentioned the details regarding how can you show the loan amount if borrowed from your friends or relatives in ITR. Let’s understand this by an instance given below.

Rajesh spends Rs. 10 lakh for a home. For the purpose of purchasing this home, he borrowed this money from his friend Shyam. The loan must be repaid in 10 equal installments over the course of one year at an interest rate of 5%. For the fiscal year 2022–2023, he paid down the principal of Rs. 1 lakh and the interest of Rs. 50,000. So, will he show the loan amount in ITR?

• Rajesh is entitled to a deduction of Rs. 50,000 under Section 24 for the payment of interest. 

• However, since the deduction is not allowed for the repayment of the loan from his friend Shyam, he is unable to claim a

  deduction under Section 80C

  for the principal repayment.

Can I make a loan from friend Income Tax interest-free?

• Yes, anyone can provide a friend or family member with an interest-free loan or a loan at a reduced rate, but such a loan shouldn't be given or collected in cash. 

• A bank account must be used for the transaction, which can be done in a number of methods, including payee checks, e-transfers, bank drafts, and more.

Hey,

Due to a medical emergency, I had to borrow Rs.30,000 from a friend. I asked my accountant if I borrow money from a friend is it taxable in India? To my surprise, the money borrowed from friends or family is 100 per cent tax-free.

No, the money you borrow from your parents is not taxable by any means. Such money or loan is usually unsecured. The terms and conditions of payback are usually undefined. Such loans are generally interest-free.

You should be aware that money as a gift from a friend/non-relative above Rs 50,000 is taxable under the financial year. There is no tax on borrowed money since it is seen as a loan. Eg. If your friend gives you seventy thousand rupees, you will need to pay tax on the amount. If you borrow seventy thousand rupees from your friend, you will not need to pay tax. You do not need to show borrowed money in your income tax return. 

According to the Income Tax Act 1961, there are certain restrictions on acceptance as well as repayment of the borrowed money/loan in cash.

• It is clearly mentioned in Sections 269SS and 269T, you cannot borrow money or accept a deposit from your friend in cash. This is to curb cash transactions to curb accumulation of black money.

• The money needs to be accounted for and transferred via account payee cheque, account payee, bank draft electronic clearing system.

• Indian citizens can only accept loans in the form of Rupees from NRI (non-resident Indians)

• Non-institutional loans of any kind are not eligible for tax deduction under Section 80C. There will be no claim of the tax deduction on the principal amount.

• It is mentioned that an individual cannot borrow more than Rs. 20,000.

If you have any more doubts on the topic of ‘if I borrow money from a friend is it taxable in India, leave them in the comment section.

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