In this instance, as it is an interest free loan, the tax rebate on interest repaid on the home loan does not arise at all. Also, if a relative gives the loan, the principal repaid on such loan does not qualify for the tax break under Section 80C.
Query:
If you give a home loan to a relative, can he claim a tax benefit on it ? Also, can you give the loan amount to the builder directly?
Siddharth, who plans to give a loan to his brother, has this query.
My brother is planning to buy a home. I have decided to give him an interest free loan for the purchase. I have the following questions:
a. Can I issue a demand note in favour of the builder, on behalf of my brother?
b. Should I draft the loan agreement?
c. Can my brother get a tax benefit if he repays the loan to me in Equated Monthly Instalments (EMIs)?
— Siddharth
Response:
Yes, you can issue a demand note in favour of the builder, on behalf of your brother. You can draft a loan agreement based on this arrangement.
What is a demand note
A demand note is an instrument on which the principal amount of the loan has to be paid when it is presented. It is useful when you want to give a loan where there is no fixed term of repayment. This gives flexibility to the borrower as well.
No tax rebate on interest
Since this is an interest free loan, the tax rebate on interest repaid on the home loan is not relevant here.
Loan for a relative – No rebate on principal
Also, if a relative gives the loan, the principal repaid on such loan does not qualify for the tax break under Section 80C.
Hence, your brother won’t be able to claim any tax benefits for the funds you lend him.