My friend requires a loan for his business. What is the most tax efficient and safe structure of investing capital? Should I give him a personal loan or should I lend directly to the company? Can I protect my investment by registering the loan? Or is there some document that I can use to make the loan safe? What are my tax implications - when will I have to pay tax on the interest earned? What if the interest accrues for 3 years and then is paid together with the principal at the end of three years? What if the interest is paid monthly?
Please suggest some options.
Asked 2 years ago in Business Law from Delhi, Delhi
1) your friend should send letter or email to you requesting for loan
2) in reply you can agree to give him a loan . time period within loan is to be repaid is to be mentioned .
3) interest rate on loan is to be mentioned and also whether payable monthly or on quarterly basis
4) no need to register loan agreement
5) transfer of funds should be by cheque . dont pay cash
6) you can ask your friend to give post dated cheque for loan amount
1. Advance loan only against a promissory note to be executed by him so that if he commits default you can file a suit for recovery of recovery. Furthermore, give it only through a cheque. No tax is payable on the interest earned on a loan.
2. In so far as the taxability is concerned, the recipient of an interest-free loan from a non-relative is not liable to pay tax. Tax liability of the loan will accrue to the recipient and not the lender but the interest earned on loan is taxable in your hands.
3. If the money is borrowed by him for his business then he is entitled to claim interest paid as a business expense under section 37 of the act.
You may lend the loan to your friend on the basis of loan agreement or a promissory note.
You can decide about the interest to be collected at the rate and intervals as agreed between both.
You can grant loan in the name of the company too but the loan agreement shall be signed by the friend in the capacity of owner.
You may obtain collateral security for the amount advanced as loan.
You may even grant him mortgage loan on the basis of the security offered by him.
The loan amount and the interest shall be reflected in the income tax return which will take care of the tax aspects.