My friends living abroad [non Indians] are ready to provide me financial loan for the purpose of education of my children. If this money comes via inward remittance, what should be the appropriate purpose of transfer of money so that I may avoid paying income tax as this is not income??

Can anybody help as I need to pay off private money lenders from whom I have taken fees money at the earliest

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    This sounds like a scam. If you have debts already that you cannot pay off, nobody (foreign friend or not) is likely to want to lend you more money so that you can educate your children. Are you being asked to pay the fees that will be charged (by banks or hawala agent) for the inward remittance? Or, are you being asked to deposit a cheque that is larger than the proposed loan amount into your own account and pay the difference in cash to the person who will bring you the cheque? I have numerous friends living abroad who write to me daily offering to lend me money for various purposes... – Dilip Sarwate Jul 9 '15 at 11:00
  • @DilipSarwate real friends, or hijacked email addresses? – RonJohn Mar 14 at 18:42

I'm not familiar with the law and taxes in India but can provide guidance based on general accounting and tax principles.

You are right that receiving money as a loan is not income and isn't liable to income tax. Therefore i suggest you actually formalise this loan through a written contract with your friend. The contract should include all the usual elements of a loan: amount, interest (even if preferential or zero), principal, term, consequences of default and currency of loan.

You can then simply state the purpose of transfer as "Personal Loan Agreement". If you have such a document and are questioned by tax authorities you can easily show that the inward remittance is from a loan and should therefore be treated like any commercial loan for tax purposes. As long as you disclose the debt in your tax return (if required in India) and your friend discloses any interest received as income i think you'll be above board and won't be liable for any income tax.

To make sure, you might be better off having a quick consultation with an accountant or tax specialist in India to advise you and draft the loan agreement.

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