Friendly loan to blood relative?

Applicable Law / Provisions

• Section 45 & 48, Income-tax Act, 1961 – Capital gains on sale of shares

• Section 56(2)(x) – Taxability of gifts (loan excluded)

• Section 269SS / 269T – Mode of accepting/repaying loans

• Section 68 – Unexplained credits (documentation importance)

• ITR Disclosure Schedules (Capital Gains & Loans Advances)

Short Practical Answer

You can safely do this by:

1. Paying capital gains tax on sale of shares, and

2. Giving the money as a properly documented interest-free loan via banking channels.

An interest-free loan to a blood relative is NOT taxable for either party if documentation is clear.

Detailed Steps / Computation

Step 1: Sale of Shares – Capital Gains Tax

When you sell the stocks:

Determine holding period

• Equity shares (listed):

  • ≤ 12 months → Short-Term Capital Gain (STCG) @ 15% + cess

  • > 12 months → Long-Term Capital Gain (LTCG)

    • First ₹1 lakh exempt

    • Balance taxed @ 10% (without indexation)

Example (illustrative):

• Sale value: ₹10,00,000

• Cost: ₹7,50,000

• LTCG: ₹2,50,000

• Taxable LTCG: ₹1,50,000

• Tax @ 10% = ₹15,000 (+ cess)

➡️ This tax must be paid by YOU, irrespective of giving money to a relative.

Step 2: Transfer Money as Loan (NOT Gift)

✔ Transfer via bank / NEFT / RTGS / cheque
❌ Avoid cash (Section 269SS penalty risk)

✔ Prepare a Loan Agreement (very important)

Loan Agreement should mention:

• Amount: ₹10,00,000

• Nature: Interest-free unsecured loan

• Tenure: (e.g., repayable on demand / within 5 years)

• Repayment mode: Banking channels

• Parties’ PAN & address

• Signatures of both parties

(Notarisation recommended though not mandatory)

Step 3: Tax Impact on Relative (Borrower)

• No tax under Section 56(2)(x) → Loan ≠ Gift

• No TDS applicable (since no interest)

• Loan amount is NOT income

⚠️ However, borrower must repay in future or document conversion to gift.

Step 4: ITR Disclosures

Your ITR:

• Report capital gains in Schedule CG

• Report loan under “Loans & Advances Given” (Schedule AL, if applicable)

Relative’s ITR:

• Show loan under “Unsecured Loans” / Liabilities

Common Mistakes to Avoid

❌ Giving money without agreement
❌ Calling it a “loan” but never repaid
❌ Cash transfer
❌ Ignoring capital gains tax
❌ Converting loan to gift without documentation

Caveats & When Human Review Is Needed

• If amount is very large relative to your income

• If loan is later disclaimer or written off

• If scrutiny notice is issued under Section 68/69

• If shares are unlisted / ESOPs / foreign shares

In such cases, consult call/email me for scrutiny-ready documentation.

Action Plan (Recommended)

1. Sell shares and compute capital gains correctly

2. Pay advance/self-assessment tax if required

3. Draft and sign an interest-free loan agreement

4. Transfer funds via banking channels only

5. Disclose correctly in both ITRs

Final Note

This structure is fully legal and commonly used. As long as capital gains tax is paid and loan documentation exists, there should be no Income-tax issue.

Yes, you can sell shares and give ₹10 lakh as an interest-free loan to a blood relative.
It is perfectly legal and not taxable, provided you follow basic documentation and banking discipline.