Income tax on interest and home loan

Hello,

I had given a loan to a friend couple of years ago. He will be returning the principal and the accrued interest together next year. 

Now, this interest income will be huge tax liability, especially as it is for many years. Can this interest income be adjusted against the prepayment of home loan? Can I avoid the tax? Else, what are my alternatives? Can I show this as capital gain and use it to part payment for a new home?

Please advise, 

Thanks,