What is P2P lending and how does it work Peer-to-peer (P2P) lending platforms connect individual lenders with borrowers online, without involving banks as middlemen. Platforms like Faircent, Lendbox, and Liquiloans allow lenders to earn returns of 9-12% by funding personal loans. You choose borrowers on the risk basis as a lender and lend in small ticket sizes, often ₹500 or ₹1,000 per borrower. It's regulated by RBI under NBFC-P2P category and subject to risk disclosure requirements.
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How interest income is taxed Your P2P interest income is "Income from Other Sources" under the Income Tax Act. It is taxed at your slab rate. If you're in the 30% slab, your P2P interest income will also be taxed. No special capital gains treatment or concessional taxation. You are required to report the gross interest received in your ITR even if it hasn't been credited to your bank account—it's subject to accrual or receipt basis, whichever is earlier.
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Is TDS deducted by P2P platforms? Very few P2P websites withhold TDS on interest paid to lenders. That means you will have to pay and report tax yourself while submitting your returns. In bank fixed deposits (FDs), where 10% TDS is withheld automatically for amounts above ₹40,000 (₹50,000 for senior citizens), in P2P websites it is all your responsibility now. If you are receiving high interest—say over ₹10,000—it is always better to keep accounts and set aside money for payment of advance tax.
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Are you able to deduct bad loans as a loss? There is a big question with P2P lending whether losses on defaulted loans can be offset against interest income received. The Income Tax Act doesn't allow for individual taxpayers to treat defaulted principal as a deductible loss unless you're a registered business. So, if the borrower defaults and you lose ₹5,000, you may not be able to claim that as a business or capital loss. You still pay tax on interest earned from other borrowers.
How to report it in your ITR If you are a salaried individual submitting ITR-1, you cannot report P2P income in it. File ITR-2 or ITR-3 depending on other sources of income. Report the interest income in 'Income from Other Sources' and specify platform-wise details if needed. Keep a cumulative statement from your P2P dashboard to support your figures. In case your P2P income is more than ₹10,000, pay advance tax every quarter to escape penalty under Section 234B and 234C.
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Ought you to borrow using your HUF or spouse? Tax arbitrage using your Hindu Undivided Family (HUF) or spouse's account is some people's game, particularly if they are in lower tax rates. As permitted by law, any income clubbing rules need to be carefully assessed. Any income clubbing back to your income under Section 64 on the money that was gifted to your spouse is possible. Utilizing your HUF or your adult child's account could be some relief in terms of tax—but speak to a CA first.
