Can I take loan from relatives?

S.C. Dhall

Q. Can I take a home loan from a relative? I heard that only the interest component will be considered for exemption from taxes. What documents will be required for this? — Nishant Mahajan

A. Yes, you can take a home loan from relatives. Under Section 24 of the Income Tax Act, 1961, tax deduction benefits will be available only on the interest paid. However, no tax deduction benefits for capital repaid will be available under Section 80C. There are specific procedures to be followed while agreeing on the loan. There is need to draft a standard loan agreement, so that the details are clear to all parties.

Pre-payment or not

Q. I had taken a home loan of Rs 15 lakh from Central Bank for 20 years at an interest rate of 9.5 per cent. Currently, I hold a surplus amount of Rs 7.50  lakh. There is no penalty in case of pre-payment of a home loan. The current fixed deposit interest rates are around 10 per cent. What should I do with my surplus amount? Should I prepay my loan or should I keep it in a fixed deposit since it will offer me 10 per cent interest? — Shally Bansal

A. Pre-payment will help you reduce the home loan burden in terms of EMI or tenure. You can check the “should I pre-pay my loan” calculator on loan websites to calculate if it makes sense for you to prepay the loan.

Also, while home loans are calculated on the basis of monthly reducing balance, fixed deposits (FDs) are compounded quarterly. If you do reverse calculation on a home loan, the interest is being compounded monthly. So, more interest will be accumulated in the case of home loans than with FDs. Also, pre-payment of loan or investment in the FD will have tax implications, so it may not remain at 10 per cent per annum.

You may find it more appropriate to pre-pay the home loan to reduce the interest payable on the loan in the long term. However, if you want a detailed calculation, please use the calculators on the loan websites.

Can I get brother’s loan transferred?

Q. My brother took a home loan three years ago but now he is shifting to USA permanently. Can I get the loan transferred in my name? — A.S. Oberoi

A.From your question, it is  not clear why you want to get the loan transferred in your name. Even if your brother moves to USA, he can continue paying the EMIs through his non-resident external/non-resident ordinary (NRO) bank account by using the online payment mode or issuing post-dated cheques or giving standing instructions from his account. Assuming that you want to avail tax benefits by paying the EMIs, you will not be able to do so. If you still want to pay on his behalf, then there is no need to get the loan transferred in your name. You can do so directly by opening a joint NRO account with your brother and then issue cheques or standing instructions from the account. You must inform the lender about the arrangement.