Deduction for interest paid on money borrowed from friends and relatives


I have borrowed from wife for buying a house. I understand that interest on money borrowed from relatives including wife is deductible under section 24 (b). Are there any restrictions about rate of interest one can pay to relatives? Whether formal stamped or registered agreement is required for this purpose and whether the same needs to be attached with the ITR (Income Tax Return)?

Under Section 24 (b) of the Income Tax Act, you can claim deduction in respect of interest on loan taken for the purpose of buying, constructing or for the purpose of repairs and renovation of your house. Such loan can be taken from anyone including your friends and relatives. Thus interest on loan taken from your wife will also be available for deduction under Section 24(b). Though there are no explicit conditions as to the rate of interest under the income tax laws, which you can pay on such loans but the rate of interest on such loans should be reasonable and comparable to those available in the market.  It can be benchmarked against the prevailing home loan rare. 

As per the latest provisions of the law, you are not allowed to attach any document with your returns of income in respect of any of your claim for deductions or exemptions including for the interest claim, but you are required to obtain and keep on your record documentary proof about the loan and interest paid as the same may be required by the assessing officer in case your income tax return is selected for detailed scrutiny. Though there is no requirement to enter into any formal written and stamped agreement but you need to obtain a certificate from the lender specifying the amount of interest in respect of such loan for the year in case the house property is self-occupied. You should also be able to prove that the money so borrowed was indeed used for the purpose of buying your house.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.

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