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?
10 April 2015
1. your understanding is correct. 2. The interest may be whatever the banks charge for housing loan. 3. You can't avoid.
Interest payment to friends and relatives can be claimed u/s 24 but only against a certificate received from them. In the absence of the certificate, you would not be eligible for the deduction. The recipient of interest income who issues the certificate is liable to pay tax on the interest income that he receives. As far as the principal payments are concerned, they would not qualify for tax benefit as loans only from notified institutions and banks are eligible for such deductions.
12 April 2015
It is not required to be issued on any stamp paper. There is no requirement of notary also. Signing the certificate, stating the interest amount, by the lender is sufficient. .
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