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How to Handle Requests for Money From Friends and Relatives
- •Evaluate your emergency fund before lending money, and only lend what you can afford to lose without disrupting your own financial plans.
- •Decide on a fixed amount before speaking with the borrower, and treat smaller contributions as gifts to avoid awkward follow-ups.
- •Use short refusals without offering lengthy explanations, and consider paying bills directly to institutions if you want to help safely.
- •Always use digital modes like bank transfer or UPI for lending, as the Income-tax Act bars cash loans of Rs 20,000 or more.
- •Be extremely cautious when asked to act as a guarantor, as your liability is as wide as the borrower's and can impact your credit score.
Key Questions Answered
The Income-tax Act, 2025, which replaced the 1961 law starting April 1, 2026, bars anyone from accepting a loan of Rs 20,000 or more in cash. The penalty equals the amount taken and falls entirely on the borrower, with no exceptions made for relatives.
Money received from defined relatives is completely tax-free in any amount. However, a friend does not count as a relative in law, meaning if a friend receives gifts exceeding Rs 50,000 in a year, the entire sum is taxed in their hands.
Under Section 128 of the Indian Contract Act, a guarantor's liability is just as wide as the borrower's. The lender can choose to pursue the guarantor directly without chasing the primary borrower first, and any default can severely damage the guarantor's credit score.
