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