I'll be lending to someone in the family outside of US(I am a US citizen living in US). The amount is reasonably large. The person is going to return me the money in chunks of $5000 each. I don't need advice on whether I should lend it or not, but I am trying to find out if I'll be taxed on money which is from my saving (after paying taxes - I am a salaried person) and I am just lending it, when I get back. I'll be earning $0 in interest. He will simply return me what I lend him. No more, no less.

You will not owe taxes on the return of the principal. However, a word of advice: you should have a written contract for this loan for two reasons:

1. Without a contract specifying the payment terms and duration of the loan (i.e, the final end date when any outstanding principal is due) the loan to your friend may be construed as a gift, and you could be hit with gift tax requirement.

2. Without a contract if your friend defaults, or is hit by a bus and his estate defaults, you will have little to no ability to get your money back.

If the loan repayment will involve interest then you will need to report the interest as income.

After some research, I need to amend my previous answer.

Any personal loan that has an interest rate that is below the market rate is called a "below-market" loan. The IRS treats this as if you actually received the interest from the borrower and then made a gift of it back to the borrower. So - you will have to report the foregone interest as income, and if the amount of forgiven interest is large enough there may be gift-tax consequences. This assumes that the amount of the loan is greater than $10K.

For more info see the section on "Below-Market Loans" here: Publication 550 (2013), Investment Income and Expenses

A loan to an immediate family member (I think immediate, it's been a while) can charge less than market rates. Rates are set monthly by the IRS, and there are different rates depending on the term.
They are called 'intra-family' loans and I have used them twice. Mine ran around half the going fixed rate for a typical mortgage at the time (but you don't have an option for a fixed rate).

I hope they still exist. Last time I looked I couldn't find them.

I don't believe it makes a difference whether the loan is to immediate family or not. The IRS does use the term "intra-family loans," I assume because the majority of low-rate personal loans are between family members, but it's a catch-all phrase and the rules apply to loans to friends or whomever under the same terms.

FYI - the current applicable federal rates are 0.48% for short-term loans (up to three years), 1.39% for intermediate term loans (3 - 9 years) and 2.41% for loans with terms greater than nine years. They update the rates every month - see: http://www.irs.gov/pub/irs-drop/rr-15-03.pdf

AFR! That's it! Thanks ebaines. Friends ask me about this every once in a while. And I didn't know that it applies to non-family too.