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House loan from family

(Querist) 10 April 2015 This query is : Resolved 
10-April-2015

Hello Experts,

I bought a new house in September 2011 against a bank loan in my name. I got the possession of the house in January 2012. All these years, I have been paying its EMI. An amount of Rs X still needs to be paid.

This year, my wife's father passed away, without leaving a will. My Mother-in-Law wants us to take an amount of Rs Y from the savings left behind by my Father-in-Law.

I and my wife have decided to take this amount Rs Y, not as an inheritance, but as a 2nd loan from my Mother-in-Law. After adding some of our own saving, we will use this 2nd loan (Rs Y) to repay and close our first loan (Rs X).

I will be making a promissory note, and making all transactions with cheques. We want to pay a monthly amount equal to our current EMI to my Mother-in-Law, to help with her monthly expenses for the next couple of years (till my wife's brother becomes independent).

Paying back the entire loan principal to my Mother-in-Law is not compulsory.

In this entire arrangement, our aim is to:
- Get rid of our house loan (I prefer paying taxes rather than pay expensive interests)
- To provide a steady monthly cash inflow to my Mother-in-Law.

If, in addition to these benefits, I can continue to claim house-loan interest for tax benefits, then we will treat this 2nd loan as an interest-bearing loan. If not, then we will treat it as an interest-free loan.

As per my limited understanding :

(a) A loan from family is tax-empted.

(b) If the loan taken from family is interest-bearing, then only the interest component (not the principal component) is exempted from tax, provided the loan is a house-loan(not a personal loan).

(c) Interest accrued/paid on the 2nd loan (from family) to repay the 1st loan (house loan from a financial institution) is allowed as a deduction.

With this background, please advise:

1. Is my understanding correct so far?

2. If I am allowed to claim interest paid on the loan taken from family, what should be the interest rate? What documents will be required?

3. I am aware that my Mother-in-Law will have to pay income tax for the interest received from me against the loan. Is there a way to legally avoid/minimize this?

Thank you in advance!

Regards,
CS
venkatesh Rao (Expert) 14 April 2015
Better put query in caclubofindia.
However, pl. note.
a)No
b)No such HBA allowed int. exemption.
c) Not at all.

T. Kalaiselvan, Advocate (Expert) 15 April 2015
Your question is without any justification. You very well know that housing loans availed from banks/financial institutions alone are eligible to tax exemption and not from a private party who is not even a money lender neither there is any loan agreement which is valid for such exemption. In my opinion your question itself is not reasonable, however you may still consult your own auditor for all such issues.
Vineet (Expert) 05 May 2015
Your intentions are very noble and happily law supports you.

You can very well claim deduction for interest paid on new loan taken from your mother in law for repayment of earlier housing loan. You can enter into a loan agreement, clearly mentioning the existing housing loan and the purpose for taking new loan. Rate of interest can be kept as reasonable and suggest that housing loan interest charged by SBI will be the best indicator.

Also mention terms of repayment. You can draw an EMI schedule which will include both interest and principle repayment. You will get deduction for interest u/s 24 of the Act for which your mother in law will issue a certificate.

You will NOT be eligible to claim deduction u/s 80C for principle repayment.

Your mother in law will have to pay tax on entire interest received from you, whereas your deduction shall be limited to Rs 2 Lakh per annum only.

Hope this helps.
cs (Querist) 08 May 2015
Thank you for your time, Experts.

Mr Vineet, I had enquired from other sources, and their answers match with yours. Your detailed confirmation is of great help. Thank you once again!


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