Many individuals think that tax benefits on loans are only available from a bank or housing finance company, but this is not correct. If you take a loan from a friend, relative, or any individual specifically for purchasing, constructing, repairing, or renewing a house, still you can claim tax benefits.
It applies equally whether the lender is your spouse, parent, sibling, friend, or any other individual.
How to Claim this Deductions?
The interest paid on a housing loan taken from friends or relatives can be claimed as a deduction under Section 24(b) of the Income Tax Act. For that you need to select "other than bank" from the option "loan taken from".
Details to report are:
- Total amount of loan.
- Name of bank or institutions or Person from which the loan is taken.
- Interest on borrowed capital u/s 24(b).
- Date of sanction of loan.
- Loan outstanding as on last date of financial year.
Applies To Tax Regimes
| Tax Regime | Self-Occupied House | Let-Out House |
| Old Regime | Interest benefit up to Rs.2 lakh and repairs up to Rs.30,000/year. | Full 100% interest deduction but loss can be set off against other income only up to Rs.2 lakh |
| New Regime | No benefit | Benefit available only for let-out property, adjusted against rent. Loss set-off/carry forward not allowed |
Purpose of the Loan – The Most Critical Factor
The loan must be for a housing-related purpose, such as:
- Buying a house, flat, or building
- Constructing a house
- Repairing or renovating an existing house
- Reconstructing a damaged property
- If the purpose is something else such as business, personal expenses, you cannot claim this deduction.
Who Can give Loan?
- Banks
- Housing Finance Companies
- Employer
- Friends
- Relatives (includes spouse, parents, siblings, etc.)
- Private individuals / moneylenders
Proof Required for Claim
You must maintain specific documentation to claim this benefit:
- Loan Agreement: Create loan agreement with signed it between you and the lender specifying: loan amount, purpose of loan, interest rate, repayment terms even if the lender is your father or friend, you need this for legal proof.
- Interest Payment Proof: Keep evidence of interest payments. Payments should be via bank transfer . Avoid cash payments, as it creates difficult to substantiate.
- Interest Certificate: Obtain a certificate from the lender stating the interest paid in the financial year.
Section 80C Benefit
If you have taken loans from friends or relatives then only interest is allowed under Section 24(b) as you cannot claim principal repayment (Section 80C up to ₹1.5 lakh) benefit. Here, the principal repayment benefit applies only to loans from banks, housing finance companies and employer.
Conclusion
You can save tax on the interest paid for a housing-purpose loan from friends or relatives, but you must have adequate legal and financial documentation. However, only interest is deductible—not principal repayment—and the benefit varies depending on whether your house is self-occupied or let-out, and which tax regime you choose.
Click Here To Know Home Loan Tax Benefits FY 2024-25.
FAQs
Individuals who have taken a home loan for purchasing, constructing, or renovating a residential property can claim tax deductions on interest under Section 24(b).
Yes, first-time homebuyers can claim additional interest deduction up to Rs.50,000 under Section 80EE or up to Rs.1.5 lakh under Section 80EEA if loan taken from bank.
Under the new regime, most home loan tax benefits like Sections 80C and 24(b) are not available, except for interest on let-out properties.
Yes, individuals receiving HRA and paying interest on a home loan can claim benefits on both, provided specific conditions such as not owning another property in the same city are met.
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