Interest on unsecured loans

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

15 April 2014 A father is a retired person whose son is in job in a foreign country. The son is sending money in indian currency in his father's bank account.(as unsecured loans. given by son to his father) In previous i.t. returns of father, no any expense of interest on such unsecured loans from son, is shown. But now, in the f.y. 2013-14, as the taxable income of father is more than the exemption limit, can the father claim the deduction of interest on such unsecured loans by giving the son the interest on such loans and showing it in return?

Querist : Anonymous

Querist : Anonymous (Querist)

15 April 2014 And if yes, then how to show the transaction of such interest given? By cash or by crediting the amount of interest in son's bank a/c?

Rupesh Jain

Rupesh Jain (Expert)
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16 April 2014 r/sir
interest on unsecured loan recd from son, father can claim only when loan use for generating income or doing any business by father.

if loan for personal exp. then no deduction can claim by father in any condition.

interest will exp agst business income.

Querist : Anonymous

Querist : Anonymous (Querist)

16 April 2014 The father is not doing any business out of the amount recvd from son. The father is using such amount just for earning interest by making f.d.s or by crediting the amount in saving account. And yes, a big portion of such amount recvd from the son is also given to his wife in india, and his wife is also earning interest on such amount recvd from his husband ,by making f.d.s and saving account.

Now, in such conditions, in this case, can the father claim the deduction for interest on son's unsecured loan? And what about the interest earned by his wife?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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01 August 2024 In this scenario, the father is receiving unsecured loans from his son and is using the funds for earning interest by making Fixed Deposits (FDs) or crediting the amount to a savings account. Here’s how the interest on such loans and the related deductions can be handled:

### **Interest on Unsecured Loans:**

1. **Claiming Interest Deduction:**
- **Interest Payment to Son:** If the father wants to claim a deduction for interest on the unsecured loan, he would need to actually pay interest to his son. The interest paid should be at a reasonable rate agreed upon by both parties.
- **Deductibility:** For an individual taxpayer (father) who is not running a business, interest on an unsecured loan used for personal purposes (like earning interest) is generally not deductible under income tax laws. Deductions are typically allowed only for loans used for generating income that falls under the heading of “Income from Business or Profession.”
- **Taxable Interest Income:** The interest income earned by the father on the funds deposited in FDs or savings accounts is taxable under the head “Income from Other Sources.”

2. **Documentation and Reporting:**
- **Payment Method:** The interest paid to the son should be documented properly. It is advisable to make the payment through a bank transfer to maintain a record. Cash transactions can be less transparent and harder to prove.
- **Reporting:** The father should include the interest income earned from FDs or savings accounts in his income tax return. The interest paid to the son, if it is considered, should be reflected as an expense in his books, although it might not be deductible for tax purposes.

### **Interest Earned by the Wife:**

1. **Interest on Funds Given to Wife:**
- **Taxability:** The interest earned by the wife on the funds received from the father is taxable in the hands of the wife as “Income from Other Sources.”
- **Gift Exemption:** If the funds transferred to the wife are considered a gift, there is no tax on the transfer itself, but the interest income earned by her is taxable.

### **Summary:**

- **Interest Deduction:** The father cannot claim a deduction for interest on unsecured loans used for personal purposes, as deductions are generally not allowed for personal loans not used for business purposes.
- **Interest Payment:** If interest is paid to the son, it should be documented and preferably paid through a bank transfer.
- **Taxable Income:** The father needs to report the interest earned from FDs or savings accounts, and the wife needs to report any interest income earned from the funds received.

### **Reference:**
- **Income Tax Act, 1961:** The relevant provisions on taxability of income and deductions are covered under various sections such as Section 56 (Income from Other Sources), Section 80C, and Section 80E, but personal loan interest generally does not fall under deductible expenses.

For accurate advice tailored to specific circumstances, it is always advisable to consult a tax professional or financial advisor.

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