Home Loan Taken from Friends or Relatives

We often turn to our family or friends in the time of financial crunch. They do their best to assist us during challenging times and also when we want a loan to buy a home. This article will guide you through the tax deductions available on both the interest and principal repayments of home loans, when the loan is taken from non-specified banks, or from friends or relatives.

Deductions for the Interest Repayment on a Home Loan

The maximum tax deduction of Rs.2 lakhs is available for the payment of interest on a housing loan. If the interest paid (or payable) is less than Rs.2 lakhs, the deduction for the amount will be available. The tax benefit is available even if the loan is taken for repair and reconstruction of the house. This deduction is restricted to Rs 30,000.

The deduction for the interest repayment is available only after the construction of the house is completed or its possession is received. Many loan agreements specify the repayment of interest starting from the month in which the loan is taken. If the construction has just begun, one can’t claim the interest repaid till the construction is completed. In that case, all the interest paid before the completion of construction is available as a deduction in 5 equal installments.

Interest repayment for a home loan taken from friends, relatives or any money lender can be claimed as a deduction under section 24.

The Income Tax Act, 1961 does not specify that this deduction will be available only if the loan is taken from specified banks.

Deduction for the Principal Repayment on a Home Loan

A deduction of Rs1.5 lakh can be claimed under Section 80C for the repayment of the principal of a loan taken for the purchase or the construction of a new house only.  This limit is inclusive of all the investments and expenditures eligible for deduction under Section 80C like Public Provident Fund (PPF), Employee Provident Fund (EPF), Equity Linked Savings Scheme (ELSS). The deduction is available only if the loan is taken from banks, Life Insurance Corporation (LIC), central government, state government or other notified institutions. The deduction is only for the repayment actually made.

Thus, repayment of the principal on a loan taken from friends, relatives or any money lender can’t be claimed as a deduction under this section.

For Example: “Mr. Akash purchases a house for Rs 20 lakh. He took a loan from his friend Mr. Vasanth for the purchase of this property. The loan is repayable in 20 equal installments with an interest of Rs 5% per annum. He repaid a principal of Rs 1 lakh and an interest of Rs 1 lakh for the financial year 2016-17.”

“Mr. Akash is eligible for a deduction under Section 24 for interest repayment of Rs 1 lakh. He can’t claim a deduction under Section 80C for the principal repayment as the deduction is not available for the repayment of the loan from friends.”