How do I make sure repayment of interest-free loan isn't taxed in my hands?

Ans: 01. Karta may give loan (with Interest or Interest Free) to HUF, which shall be returned after some time, but through banking channels only.
02. In case of Interest on this loan, the Interest part can be claimed as expenses (deduction) from the Income generated by HUF.
03. These transactions need to be disclosed in both ITRs (of Karta & HUF's).
Hope this clears all your doubts. However, most welcome for any further clarifications. Thanks.

Ans: The refund you receive is considered a capital transaction. Whether it is taxable depends on specific factors. Below is a detailed analysis:

1. Taxability of Refund Received
Principal Amount Paid:
The principal amount refunded is not taxable. This is because it is your own money returned.

Interest Paid by the Builder:
Any interest or additional amount refunded is taxable. It will be considered "Income from Other Sources."

Loan EMIs Paid:
Refund of EMIs made towards loan repayment may include interest and principal components. The interest portion refunded could be taxable as per tax rules.

Cost Indexation Benefit:
Since you booked the property for investment, any capital gain or loss may apply. This depends on how the tax department views the refund transaction.

2. Possibility of Transferring the Amount to Your Spouse
Gifting to Spouse:
You can transfer the amount to your spouse without immediate tax implications. Gifts to a spouse are exempt under the Income Tax Act.

Clubbed Income Rule:
However, if your spouse invests this amount and earns income, it will be clubbed with your taxable income. You will have to pay tax on the income generated from such investments.

Using a Joint Account:
Alternatively, consider using a joint account for better transparency and tracking of funds.

Steps for Managing Tax Liability
Evaluate Refund Break-Up
Ask the builder for a detailed breakup of the refund amount.
This should include the principal amount, interest, and EMI refund details.
Tax on Interest Component
The interest portion will be taxed under "Income from Other Sources."
Include this amount while filing your income tax return (ITR).
Utilise Capital Gains Exemptions (If Applicable)
If the refund amount results in capital gains, you can reinvest in certain tax-saving bonds under Section 54EC.
Alternatively, reinvesting in another residential property could provide tax exemption under Section 54F.
Keep Documentation Ready
Maintain all records of payments made to the builder and the refund received.
This will be helpful in case of any scrutiny or queries from the Income Tax Department.
Recommendations for the Refund Amount
Do Not Invest Entirely in Fixed Deposits
Fixed deposits offer low returns, which may not beat inflation in the long term.
Consider growth-oriented investments like mutual funds for better returns.
Explore Mutual Funds for Better Returns
Invest part of the amount in diversified mutual funds for wealth creation.
Actively managed funds outperform passive options over the long term.
Consult a Certified Financial Planner to align investments with your goals.
Maintain Liquidity for Immediate Needs
Keep a portion of the refund in a liquid or short-term debt fund.
This ensures funds are readily available for short-term needs.
Final Insights
The principal portion of the refund is not taxable.
Interest and EMI refunds may attract tax under specific conditions.
Transferring the amount to your spouse is possible but involves clubbing rules.
Diversify investments into mutual funds for long-term benefits.
Maintain proper documentation to handle tax implications smoothly.
Seek personalised guidance from a Certified Financial Planner to optimise the utilisation of this refund.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

Ans: Appreciate your honest query. You are thinking practically. That shows financial awareness. Managing loan closure from borrowed funds is a big decision. Let us assess the tax angle from all sides.

? Loan Repayment with Borrowed Funds – No Direct Tax

Loan repayment is not considered income.

So, if you take money from someone and repay your own loan, there is no tax.

Income Tax Act does not tax money used for loan repayment.

No tax arises from repaying a personal, car, home, or business loan.

But certain other angles must be considered carefully.

? Borrowed Funds Must Be Properly Documented

If you borrow from a friend or relative, keep it documented.

Use a written loan agreement even for personal loans.

Mention amount, date, and repayment terms clearly.

If it is interest-free, mention that in writing too.

Without documentation, tax officers may treat it as income.

? Income Tax Rules on Gifts and Personal Loans

If someone gives you money without repayment clause, it becomes a gift.

Gifts from non-relatives above Rs 50,000 in a year are taxable.

But if it is a repayable loan, then no tax.

So never accept a large amount without a written loan agreement.

Avoid cash transactions above Rs 20,000. Prefer bank transfer.

? Maintain Clarity During ITR Filing

While filing income tax returns, disclose loan borrowed if asked.

Keep bank proof of both incoming and outgoing funds.

Any big cash deposits will raise red flags.

If you borrow and repay via account transfer, it is clean.

But large unexplained transactions attract tax scrutiny.

? If It’s a Business Loan, Consider GST/Accounting Rules

If your loan is linked to business, record it properly in books.

Mention interest if applicable.

Ensure it’s reflected in your profit and loss or balance sheet.

For salaried individuals, this may not apply.

? If You Use Borrowed Funds to Prepay Home Loan

If you repay a home loan from borrowed money, there is no tax.

But home loan interest benefit under Section 24(b) continues only for genuine interest.

You may lose the tax benefit if the original loan closes early.

Weigh tax deduction vs. mental relief carefully.

? Future Loan Eligibility May Get Impacted

If you repay loan using borrowed money, it lowers actual debt.

But credit report shows closure without income growth.

Lenders may question such repayment patterns in future loans.

So keep documentation strong and purpose clear.

? Don’t Take Loan from Unknown or Unofficial Lenders

Borrowing from informal or local moneylenders brings legal risks.

Their loans are not tax-linked but may have harsh repayment rules.

Also, they don’t issue receipts or agreements.

This creates audit and compliance issues in future.

? Large Personal Loans Must Follow These Guidelines

Prefer bank-to-bank transfer.

Mention purpose clearly in memo line.

Take PAN details of the person giving loan.

Keep a signed declaration that it is a loan, not a gift.

If interest is involved, keep it documented.

? Repaying Your Own Loan is Always Good

Loan burden creates mental and financial stress.

If you find a way to clear it, do it responsibly.

But tax rules must not be ignored in the process.

Loan-free status improves credit score and future cash flow.

? Avoid Loan Settlement with Banks if Possible

Loan settlement affects credit history.

Bank may write off part of loan, which becomes income.

That written-off part is taxable.

Always try to repay full loan, not settle it with bank’s compromise.

? If You are Paying Tax Already

The loan closure with borrowed money does not change your taxable income.

Your salary or business income will still be taxed normally.

There is no extra tax just because you took help to repay loans.

But the source of borrowed amount should be genuine.

? Future Tax Filing Needs Clear Trail

Income tax department watches large transactions.

So, keep written proof of loan borrowed and loan repaid.

Always repay through bank transfer, not cash.

Any big unexplained entry may invite notice.

Keep lender's PAN handy if needed in future queries.

? Personal Loan from Relative is Acceptable

Loan from spouse, parents, siblings is fully legal.

No tax if repaid properly.

But again, documentation is the key.

An affidavit or notarised paper can be used.

? Loan Forgiveness by Lender Has Tax Implication

If your lender later says you don’t need to repay, that amount becomes income.

In that case, you need to show it in your ITR.

Tax will be applicable as per your slab.

So always return the amount to avoid income classification.

? Loan Repayment from Business Account

If you use business account to repay personal loan, avoid mixing.

This may raise GST or audit concerns.

Keep personal and business banking separate.

Tax audit triggers get activated with unclear transactions.

? Don’t Use Undisclosed Sources

If money borrowed is not traceable to a person or bank, it becomes risky.

Tax officer may treat it as black income.

Avoid cash hand loans. Prefer digital methods.

Keep paper trail clean and updated.

? Financially, Loan Closure is a Positive Move

Interest saved improves long-term wealth.

Stress reduction is an invisible benefit.

Use this chance to start fresh with budgeting.

Build an emergency fund next.

Then start investing step-by-step.

? If the Rs 25 Lakh Loan is on Home

Check if you're claiming housing loan tax benefit.

After closure, tax benefit under Section 24 and 80C will stop.

But if stress is high, loan closure is still better.

Consult a CFP-backed MFD before stopping long-term tax-saving options.

? Tax on Loan Transaction Only Comes in Special Cases

Gift from non-relative above Rs 50,000 is taxed.

Loan waiver is taxed.

Undocumented cash loan attracts penalty.

Otherwise, regular loan repayment has no tax.

? Debt-Free Living Opens New Possibilities

You can start SIPs and insurance planning.

Health and term plans become affordable.

You can start investing toward goals.

Use this reset to improve cash discipline.

A CFP can help you structure this change wisely.

? Finally

Repaying your loan with borrowed funds has no tax impact if documented well.

Avoid cash, maintain proofs, and take written loan confirmation.

After loan is cleared, begin fresh with savings and investment planning.

Take guidance from a CFP-backed MFD for right product choices.

Financial freedom begins when loan burden ends. Start building wealth peacefully.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: Since all transactions related to house property are being accounted for in your accounts, you should also declare this Income (Receipt) of Rs.36,000.00 in your income & pay tax, if any. This amount cannot be reduced from Interest paid, rather you have to show this as income under the head "Income from Other Sources."
Most Welcome for further clarifications, if any. Thanks.