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Must I pay interest on a loan from a friend?

Ramalingam

Ramalingam Kalirajan  |8365 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 27, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Deep Question by Deep on Aug 13, 2024Hindi
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I have received unsecured loan from my friend on Jan 2022 of Rs 5 Lakh and repaid loan on July 2024. I am having my tax Audit. Is it mandatory to give him interest? If yes, then what are the consequences of not paying interest?

Ans: It is not mandatory to pay interest on an unsecured loan from a friend. If no interest was agreed upon initially, you are not required to pay any.

However, for tax purposes, if the loan was interest-free or at a lower-than-market rate, the tax authorities may consider it a "deemed gift" or impute interest income under certain circumstances. This could lead to scrutiny during a tax audit.

If interest was agreed upon and not paid, it might raise concerns during the audit about the genuineness of the transaction. Ensure all documentation clearly reflects the terms of the loan to avoid complications.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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