Tax Implications of taking home loan from your brother

Taking a home loan from a brother may seem like an easy and convenient option, but it is important to consider the tax implications before doing so. In this blog, we will discuss the tax implications of taking a home loan from a brother.

Tax Implications for the Borrower

1. Interest Paid on Home Loan: If you are borrowing money from your brother for a home loan, the interest paid on the loan is not eligible for tax deduction under Section 24 of the Income Tax Act, 1961. This means that you cannot claim tax benefits for the interest paid on the home loan.
2. Repayment of Principal Amount: The repayment of the principal amount borrowed from your brother will not be eligible for tax deduction under Section 80C of the Income Tax Act. This means that you cannot claim tax benefits for the principal repayment.
3. Gift Tax Implications: If your brother is gifting you the money for the home loan, the amount received will not be taxable as per the Income Tax Act. However, if the amount exceeds Rs. 50,000, it will be taxable under the Gift Tax Act.

Tax Implications for the Lender

1. Interest Earned on Home Loan: If your brother is lending you the money for a home loan, the interest earned on the loan will be taxable as per the Income Tax Act under the head ‘Income from Other Sources.’ Your brother will need to pay tax on the interest earned at the applicable tax rate.
2. Tax Deduction for Bad Debt: If you default on the loan repayment and your brother decides to write off the loan as a bad debt, he can claim tax deduction under Section 36(1)(vii) of the Income Tax Act for the amount written off.

Taking a home loan from a brother has both tax implications for the borrower and lender. The borrower cannot claim tax benefits for the interest paid or principal repayment, while the lender needs to pay tax on the interest earned. It is advisable to consult a tax expert before taking a home loan from a brother to understand the tax implications better. It is also recommended to have a proper loan agreement in place to avoid any disputes in the future.