Tax Implication on write off of Unsecured Loan liability, after death of loan borrower, vis-à-vis what would be tax Implication in the hand of lender.

[PRIYAM KHAMBHATA]

Mr. A, (senior citizen), who has taken loan of Rs.10,00,000/- in FY 2021-22, with 8% rate of interest per annum in FY 2021-22 from Mr. B. Subsequently, Mr. A has been made Gift to his grand son, out of the such borrowed funds in FY 2021-22. Mr. A, passed away in FY 2023-24 and Rs.10,00,000/- is still outstanding. There is no sufficient funds available with borrower, to pay such outstanding unsecured loan to the lender. What would be tax implication, after death of borrower in respect of such outstanding loan liability in the hand of borrower, vis-à-vis in the hand of loan lender. Please guide me.

[YAGAY and SUN]

Upon the death of Mr. A, his legal heirs are not personally liable to repay the outstanding unsecured loan of ₹10,00,000 unless they inherit assets from his estate. In such a case, the liability of repayment is limited to the extent of assets inherited. If no assets or insufficient assets are inherited, the lender (Mr. B) cannot recover the balance from the legal heirs beyond the estate value. There is no tax implication in the hands of the borrower posthumously, as the liability ceases due to death and absence of recoverable estate.

In the hands of the lender, if the loan becomes irrecoverable, it may be treated as a capital loss; however, since the loan was of personal nature and not advanced in the course of business, such loss is generally not allowed as a deduction under the Income Tax Act. Hence, Mr. B may not be able to claim any tax benefit for the non-recovery of such personal loan.

AI Summary

Heirs' limited liability: estate assets alone meet deceased borrower's debts; lender's personal bad debt generally nondeductible.
Heirs are liable for the deceased borrower's unsecured loan only to the extent of assets inherited from the estate, and there is no separate tax liability in the borrower's hands after death. For the lender, an irrecoverable personal unsecured loan may amount to a loss but is generally not allowable as a deductible loss under income tax rules when the loan was not advanced in the course of business.