Will my parents be taxed on the interest charged if they lend me money for a home loan?

If my parents have lent me for home loan, then will they be taxed as per their tax bracket based on the interest charged on the loan amount
Anurag Panigrahi

Reply by Adhil Shetty, CEO of BankBazaar.com

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If you have borrowed money from your parents and are repaying it to them with interest, then any interest income they earn from the loan they've advanced to you would be a taxable income that needs to be declared in their Income Tax Returns under "Income from Other Sources". 

The tax rate applicable would be based on their total taxable income, including this interest. Note that if this interest income pushes their total income into a higher tax bracket, the higher rate would apply to the portion of income within that bracket.

In case the amount is outright gifted to you through a gift deed or otherwise and you are repaying them back, then there may not be tax implications. Nevertheless, keep in mind that gifting of large amounts will always have a tax impact.

It is important to understand that though the money is used by you to purchase a home, it may not necessarily quality as a home loan. While Section 24 of the income tax act under old regime allows you to claim deductions on Interest repayment for a home loan taken from friends or relatives, or other forms of non-institutional financing, you will still need to document your borrowing properly with the required terms and conditions to be able to avail tax exemptions.

If you are considering borrowing from your parents instead of a financial institution, then make sure to consult a tax advisor first for tax planning and to understand all the implications and ensure compliance with tax laws.

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