If my friend transfers INR 10,000,000 into my bank account and we make a legal document for the same to return the amount at 7% per annum for next 12 yrs, should I pay tax on the same?

If my salary is INR 150,000 per month, and I pay INR 60,000 per month to my friend to repay the debt, will income tax be deducted as if I were earning only INR 90,000/month, or will income tax be deducted from the INR 150,000 /month salary, and I have to pay INR 60,000 each month to my friend from what is left of my salary after the income tax is deducted?

  • 2
    The interest income goes to your friend, and in Australia (not sure about India), borrowed principal isn't taxed. What tax are you asking about when you say "tax on the same"?
    – Lawrence
    Oct 4 '18 at 13:38
  • 1
    Hi, New to finance! Please note that "crore" and "lakh" are not known or used in the western world, using these might reduce the clarity of your question.
    – zovits
    Oct 5 '18 at 10:39
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    @zovits: TBH if you're familiar enough with the Indian tax system to answer this question, "crore" and "lakh" will be familiar.
    – MSalters
    Oct 5 '18 at 14:30
  • Potentially off topic, but a request for clarification...the title says 7% interest, however op says "return the amount at 7% per annum for next 12 yrs", meaning a total of 8.6m, which "I have to pay INR 60,000 each month to my friend" roughly supports. Edit: if this is like the US, then he may have to pay taxes on the forgiven debt at the end of the loan. Oct 5 '18 at 16:39

Loan repayment can't be tax deductible except for home loan. If the home loan for first house is taken from close friends and relatives, it has the same tax benefits as if taken from bank. The rate of interest in such cases can't be more than prevailing market rates.

Your friend has to pay taxes on interest income.

The numbers don't add up. On your income of 1,50,000 you would be paying tax of Rs 30,000. Take home of around 1,20,000

If you take a loan of 1,00,00,000 for 12 years at 7%; you have to pay monthly installments (i.e. EMI) of 1,03,000. So unless you plan to pay more in later years or pay for a longer duration; you cannot afford this loan.


Welcome new user.

If YOU are getting the loan money and YOU are PAYING the interest, you do not pay any tax.

(You're not the one GETTING money.)

Your friend is GETTING money, so your friend pays tax. It is income, like any other income.

  • 3
    Yes but he (or she) talks about paying tax on his income. He still pays interest in after-tax money, and that interest is then again taxed because the friend earned it as income.
    – user12515
    Oct 4 '18 at 20:03
  • hi @Michael . I think you are talking about "the money the OP uses, to pay the interest" Is that right? We have no clue what that money is. It may be from savings, it may be the user's "income" or whatever. Yes, of course obviously that money would have been taxed (like every other dollar in the universe :) ) It could be you mean "there is no deduction on that interest, unlike the special case of a home loan" .. is that right?? Anyway cheers
    – Fattie
    Oct 4 '18 at 20:15
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    Yes, OP is taking about using his salary to repay the loan and as asked it seems to imply a possible belief or hope that double taxation won't occur, which is not the case for the interest portion of the funds.
    – user12515
    Oct 4 '18 at 20:18
  • OK .. well .. the question is very unclear, and it doesn't really mention "deduction" anywhere. Note however that if the loan IS for a home, then OP indeed DOES get the tax deduction.
    – Fattie
    Oct 4 '18 at 20:39
  • Is this applicable everywhere (including india)? Oct 5 '18 at 6:50

This is a fantastic deal for the OP who truly has an extraordinarily generous friend. Note that monthly payments of INR 60K for 12 years add up to INR 8640K which is less than the INR 10000K that was borrowed. So, unless the OP is planning on an unmentioned balloon payment at the end of the 12 years, the loan will still not have been paid off in 12 years and the remainder of the loan amount (plus interest over the 12-year period) is being forgiven (i.e., is a gift from the friend. For an actual loan of INR 1 crore at 7% to be paid back over 12 years from, say, a bank, the monthly payment (EMI) is about INR 1,02,840, and the sum total of payments is a little over INR 1.48 crore.

There is no income tax due from the OP on the loan proceeds of INR 1 crore received from the friend; amounts received as loans are not taxable income to the borrower. The transaction might be subject to the new GST tax but that's a separate issue. The interest component of the monthly repayment (EMI) is taxable income to the OP's friend; the component of the EMI that represents principal is not taxable income to the OP's friend. No part of the EMI can be deducted from gross income to arrive at the taxable income, unless the loan is structured as a mortgage secured by the OP's home.

  • 3
    So... you’re saying it’s a great deal, only having to pay back ~86% of the principle. Oct 4 '18 at 17:57

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