Question about taking loan from NRI

Hi Sunder,

Thanks for your detailed query about taking a loan from your NRI brother’s NRO account. Here's a breakdown of the tax and regulatory implications for both you and your brother:

1. Loan from NRI (Your Perspective in India)

• Taxability:
  A loan taken by you from your NRI brother is not taxable as income in India, as a loan is a liability, not income.

• Interest Payment:
  You plan to pay 5% interest. This interest payment is tax-deductible for you only if the loan is for a business or income-generating purpose. Since this loan is for your daughter's education, which is a personal expense, no deduction on interest payment is allowed.

• TDS on Interest:
  Since your brother is an NRI, the interest paid by you to him will attract TDS @ 30% plus applicable surcharge and cess under section 195 of the Income Tax Act.

  • You, as the payer, must deduct TDS on interest payments and deposit it with the Indian government.

  • Form 15CA/15CB formalities may be required.

• Loan Tenure:
  There is no fixed maximum tenure for loans from relatives; however, to avoid any complications, the tenure should be commercially reasonable—typically 3-5 years is common, but can be longer if documented.

• Loan Agreement:
  It is advisable to have a proper loan agreement with terms, interest rate, repayment schedule, and interest calculations.

2. From Your Brother’s Perspective (NRI in USA)

• Interest Income in India:
  The 5% interest he receives on the loan from you is taxable in India as income from other sources.

• TDS Credit:
  The TDS deducted by you can be claimed as credit against his Indian tax liability when filing his Indian income tax return.

• Double Taxation Avoidance Agreement (DTAA):
  Since your brother is a US resident, he can claim relief under the India-USA DTAA to avoid double taxation on the same interest income.

• US Tax Implications:
  He must report this interest income on his US tax return as well (since the US taxes its residents on worldwide income). He can claim credit for taxes paid in India to avoid double taxation.

3. Additional Advice

• NRO Account Lending:
  Funds in NRO accounts are repatriable up to USD 1 million per financial year, which includes principal and interest, subject to documentation and RBI guidelines.

• Compliance:
  Ensure all payments (loan disbursal and repayments) are routed through proper banking channels with KYC documentation.

• Documentation:
  Keep loan agreements, repayment receipts, bank statements as proof for tax authorities.

• Legal Advice:
  Consider consulting a tax expert in both India and the USA to optimize tax planning and compliance for you and your brother.

Summary