Sir, One of my friend who doesn't have steady income, have got 60lakhs rupees from house property sale. He doesn't file itr due to having less income than the threshold. Now he wants to give me loan of 25 lakhs to repay my debts from the bank. I want to make a loan agreement with him for clarity and i want to put repayment schedule of 10years. Is it valid as per the IT act? Would there be any consequences/ tax while filing itr?

Ans: Senior citizen can submit form 15H if tax calculated on income is NIL. Further, a resident individual with taxable income up to Rs 7,00,000 will receive a rebate from tax upto Rs 25,000.

Thus, in your case if tax on bank interest and sale of shares is less than 25000, you can submit form 15H.

Ans: Hello, ITR 2 is to be filed

Ans: Your decision to extend a loan instead of a gift is prudent. It reduces potential income tax issues for you. Structuring this arrangement through a proper loan agreement ensures legal validity and clarity.

The direct payment to the seller strengthens your case with the tax authorities. It avoids suspicion about unaccounted money being involved in the transaction.

Your friend’s income from side roles in films, though modest, and the absence of tax filings, could raise concerns. This property purchase could attract scrutiny from the Income Tax Department.

Key Considerations for Structuring the Loan
Drafting a Loan Agreement
The loan agreement must clearly outline the terms of interest, tenure, and repayment. Specify the capital repayment timeline of ten years. This document is crucial for tax compliance and transparency.

Payment through Banking Channels
Ensure all transactions are routed through bank accounts. Avoid cash payments at any stage of the process.

Fair Interest Rate
A 6% annual interest rate is reasonable. It avoids being classified as a concessional or interest-free loan. This ensures no deemed gifting complications arise under the Income Tax Act.

Documentation for Proof of Loan
Keep proof of the loan, like bank transaction records, loan agreement, and interest payment receipts. This safeguards both parties from legal complications.

Tax Implications for You
Interest Income
The interest earned at 6% annually is taxable under “Income from Other Sources.” Declare this income in your tax returns every year.

TDS Compliance
Your friend must deduct tax at source (TDS) on the interest paid if applicable. Verify the threshold limits for TDS compliance to avoid issues.

Avoidance of Deemed Gift Issues
Since this is a loan and not a gift, no gift tax liability arises for either party.

Tax Implications for Your Friend
Income Tax Filing Requirement
Your friend’s cash income of Rs. 2.5 lakh annually is below the taxable limit. However, purchasing property valued at Rs. 28 lakh will create an asset in his name. This can draw the attention of tax authorities.

Reporting High-Value Transactions
Property purchases exceeding Rs. 30 lakh must be reported to the tax department. In your friend’s case, though below this limit, the source of Rs. 8 lakh (balance) must be clearly justified.

PAN and Filing of Returns
Encourage your friend to start filing Income Tax Returns. Filing returns enhances financial credibility and avoids scrutiny.

Recommendations for a Smooth Transaction
Source of Funds Verification
Ensure your friend has proper documentation for the Rs. 8 lakh balance payment. This will minimise questions from authorities.

ITR Filing as a Preventive Measure
Advise your friend to file ITR even if his income is below the taxable limit. This helps justify his financial profile in case of scrutiny.

Registering the Property Appropriately
Register the property with accurate details, including the loan arrangement. Keep registration costs and stamp duties in mind.

Monitor Interest Payments Regularly
Track interest payments diligently. Ensure these payments are timely and through proper banking channels.

Final Insights
Your thoughtful approach of structuring this transaction as a loan safeguards both parties. It ensures transparency and compliance with tax laws. Document every step meticulously and keep the financial arrangements clear. Encourage your friend to regularise his tax filings and maintain financial discipline.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: For this case, we need to understand your profile as well.
Following questions are important before giving any advise:
Are you salaried person, are you filing IT Returns regularly, how are you going to pay your friend, is your friend going to return the amount

Vipul Bhavsar
Chartered Accountant
www.capitalca.in