Loan payment/re-payment between friends without paying tax

POSTED BY Prasoon ON September 12, 2012 2:01 pm COMMENTS (4)

If one of my friend is taking a personal loan to clear my credit card debts, as I am not eligible to take a PL due to current debts – What would be the best way of transaction for payment and re-payment, considering income tax? Till I repay him, he’ll continue paying EMIs. We are residing in different cities. Obviously, no one wants to pay tax on no-income. 

a) We decided that – He will clear my credit card debt directly using his online banking. Once I get a PL, I’ll clear his PL directly. Possible? Logical?

b) He transfers whole amount to my account and I make CC payment. Then I transfer amount in his account, and he repays PL.

Is there any better way? What could be tax implications in both cases? What should we consider, keep in mind, and take care of?

4 replies on this article “Loan payment/re-payment between friends without paying tax”

  1. Dear Prasoon, yes, this loan deed ‘ll do the job for you.

    Thanks

    Ashal

  2. Prasoon says:

    I know, it’s being a bit legal. But, I couldn’t think of any better place than JI.

    I assume, I need to type the matter on 50/- stamp paper and make it notorized. I found a sample agreement on internet and made a bit of modification. Could you please confirm if this is correct/enough?

    LOAN AGREEMENT

    This Agreement is made at ____________ on this ___ day of ______________ , between :- Mr. ___________ S/o _______________ resident of _______________ (hereinafter called the Part of First PART )

    AND

    Mr. _____________ S/o _______________ R/______________________ hereinafter called the party of the second part)

    WHEREAS the second party is in need of money and is having friendly term with the party of the first part and requires a sum of Rs. ____________/- (Rupees ___________ only)

    AND WHEREAS, the first party has agreed to give the said loan amount to the party of the second part and in lieu of this payment this receipt cum agreement is being executed between the parties.

    AND WHEREAS, the second party will make repayment of full amount in requested manner by first party at the time of repayment.

    In witnesses whereof the parties of this agreement have set their respective hands on the date month and year first above given.

    1. FIRST PARTY

    2. SECOND PARTY

  3. Dear Prasson, please prepare a loan deed between you & your friend to avoid taxation related problems.

    Thanks

    Ashal

    1. Prasoon says:

      I intended to reply you. Please see below post.

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