Let’s say I take a Rs. 5,00,000 loan from my relative or bank for 30 days, at a rate of 10% interest. Now for 20 days out of the 30 days, it was in my savings account, accruing interest at 7%.
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Interest accrued from this Rs. 5,00,000 @7% for 20 days = Rs. 1,917.81
Other Bank interest over the year (let’s assume) = Rs. 5,000.
Interest paid to relative for loan @10% for 30 days = 4,109.59
Total Interest collected: Rs. 6,917.81
Total Interest Paid: Rs. 4,109.59
Can we deduct Rs. 4,109.59 from Rs 6,917.81 and show it as an expense when showing income from other sources when filing the ITR? If we can’t then I will end up paying 30% on the full 6,917.81 + the interest paid to the relative/bank.
Similarly, if I took a loan from an Overdraft account, and I charge someone interest for it, can I deduct the interest earned from the relative so as to not bear 30% tax for the interest?
Interest earned from bank is taxed under the Income head “IFOS” and taxable at slab rate. You cannot deduct the interest paid to relative from the same.
However, if you have any income from Business & Profession and if you would have used money taken from relative for running that business, you can deduct the interest as business expense.
Thus, in your case if we assume you do not have Income from Business & Profession, you have to pay tax on entire 6917.8 at applicable slab rate.
When filing your Income Tax Return (ITR), you cannot directly deduct the interest paid to your relative or bank from the interest earned on your savings account. Interest paid on loans is typically not considered an expense that can be deducted from interest income.
However, if the loan taken from your relative or bank was for a business purpose, you may be able to deduct the interest paid as a business expense if it meets certain criteria and is supported by proper documentation.
Regarding the interest earned from charging someone interest on a loan taken from an Overdraft account, it would be treated as income from other sources. You can offset the interest earned from the relative against the interest paid to the bank when calculating the taxable interest income. This ensures that you are taxed only on the net interest income earned after deducting the interest paid on the loan.
It’s essential to consult with a tax advisor or chartered accountant for specific guidance tailored to your individual financial situation and to ensure compliance with tax regulations.
