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IndiaTax & ComplianceUpdated: Sep 13, 2026
Direct Answer
Unsecured loans from friends must strictly comply with Section 269SS (no cash loans over Rs 20,000). You must prove the identity and creditworthiness of the friend, and the genuineness of the bank transfer, otherwise it will be taxed as unexplained cash credit under Section 68.
Section 68 Scrutiny
Taking a loan from a friend is perfectly legal, but it is a highly scrutinized area in tax audits. The Assessing Officer will demand a three-part test:
- Identity: Provide the friend's PAN card and Aadhar.
- Creditworthiness: Provide the friend's Income Tax Return (ITR) and bank statement to prove they actually had the money to lend you.
- Genuineness: The transaction must be routed through banking channels (NEFT/RTGS/Cheque).
If your friend cannot justify their source of funds, the tax department will treat the loan as your own hidden income.