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How to treat a loan from a friend?

12 May 2017

I want to borrow an amount for my business from a friend at a particular ROI. Please let me know 1. How will I treat that into my accounts? 2. How will my friend treat the same in his ITR? 3. How the repayment is treated by me and my friend? 4. Whether my friend is taxed on Interest amount or on Principle + Interest?

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6 Replies

basant (Accounting & Taxation) (390 Points)
Replied 12 May 2017

What is the Loan Amount??? Weather loan mode is cash/cheque/others.?? This Loan Amount is investment for your freind. If Loan Interest excedding 5000 rs then Tds is deducted @ 10% U/S-194A. or If Your Income is below exemption limit then simply provide -15G/15H for non-deduction of TDS. Read Section 269ST & 269SS of Income Tax Act for more Details!!

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Ankit Manocha (MBA) (40 Points)
Replied 12 May 2017

Hello The loan amount is 10 lac and he will be transferring it to my account. The ROI is 11% reducing and it will be repaid in EMI over a period of 5 years.

Farhaad Jiwani (Tax Consultant at Nagpur) (303 Points)
Replied 13 May 2017

hello Ankit
first of all trf the loan with Bank mode only. now the answer comes point wise
1) u get the amt in your a/c and show under unsecured loan (from ur frnd) in B/S.
2) he will show under asset side of his B/S.
3) make sure to trf the intt amt by Bank mode into his a/c, u'll show as expense under P&L A/c (intt amt) and he'll show indirect income in his P&L A/c [if loan is taken in your business purpose]
4) ur frnd will be taxed for the income he has earned ie. intt income only.

1 Like

Farhaad Jiwani (Tax Consultant at Nagpur) (303 Points)
Replied 13 May 2017

hope this will help u

Ankit Manocha (MBA) (40 Points)
Replied 13 May 2017

Thanks a lot Farhaad Sir. I have couple of more queries related to the same issue.

1. My friend is doing a job in Singapore, so should he transfer the loan amount from his Indian account or NRE account?
2. In which account he should transfer (Personal or Current) since I am a proprietor?
3. To make is more legal, can we enter the details such as loan amount, ROI, Tenure & other T & C on a stamp paper so that he is taxed only on interest amount and I can show it as an Unsecured Loan in my B/S?

Second query is :

My requirement was 15 lac and out of this my contribution is 5 lac and rest my friend is contributing. He suggested me that out of 10 lac which he is contributing 5 lac is treated as loan so that EMI pressure is minimised and 5 lac is treated as 25% partnership even though he is contributing 33% of the total, but because he cannot give time he is limiting himself to 25% partner.
1. Now the question arises how to legalize this partnership and does it not make it more complicated?
2. Do we have to form LLP to legalize this partnership?
3. Can he enter into LLP while doing a job even though outside India?
4. How will the income or loss treated in his ITR?

Which of the option is more beneficial and less complicated?

Regards