Are There Any Tax Benefits on Personal Loans?

Written by Neo Dino

Personal loans are one of the most suitable ways to acquire substantial funds immediately on credit. Generally, the borrowed amount is not liable for a tax deduction which means that you are not required to inform the Income Tax Department while filing for your annual income tax returns. Even though there is no mention of tax benefits on personal loan in the Income Tax Act, there are several methods by which availing personal loans can qualify you for tax .

Tax benefits on personal loans

Personal loans fall under the category of unsecured loans which indicates that borrowers are not required to pledge any collateral to avail this loan. Personal loans do not directly fall under tax exemptions unlike secured loans such as home loans and loans against properties. Yet, you can avail a few personal loan tax benefits in the following ways –

Personal loans for business

Borrowers who have availed a personal loan and invested the funds for business purposes can claim the interest payable as an expense. The amount spent towards paying the interest component of your personal loan EMIs, if identifiable as funds used for business establishment or expansion, can be regarded as a legitimate business expense by the Income Tax Department. As such, the borrower can claim Income Tax exemptions per annum equal to the interest paid on the loan.

Note that borrowers may be required to provide the required proof to avail the benefits. This helps in reducing the tax liability of a borrower and lowers the total tax payable on the profits generated by the business.

Personal loan for purchase or construction of residential property

Under Section 24(B) of the Income Tax Act, borrowers using their personal loan amount for the purchase or renovation of a residential property can claim the loan interest payable in a financial year as taxable income exemption.

As the owner of the concerned property, you can claim a tax deduction up to Rs.2 lakh while in the case of a rented property, the total interest payable on your personal loan is eligible for tax benefits beyond any predetermined limit.

Personal loan for education

As per Section 80(E) of the Income Tax Act, borrowers can claim tax deductions on the payable interest amounts of education loans. Since personal loans do not possess any end-use restrictions, a borrower can choose to avail a personal loan and use it to pursue a career in higher education.

Personal loan for investment in assets

If the funds gathered from a personal loan are used for investment in assets such as stocks, shares, jewellery, non-residential property, etc. borrowers can claim tax benefits for the payable loan interest amount. Note that the loan interest amount is not regarded as an expense by the Income Tax Department on the year of purchase of the asset and of availing the personal loan.

However, the amount is considered in the cost of acquisition of the asset and plays a major role in reducing capital gains on the asset during its time of sale. Hence, borrowers cannot claim tax benefits on the initial years of paying the loan interest, but this amount is eligible for deduction in the year the said asset is sold.

From the above discussion, it is quite clear is a personal loan is taxable or not. For all these cases, borrowers should keep in mind that the principal amount in your loan EMIs is not applicable for tax benefits; only the interest component in your loan repayments are eligible for tax deductions.

Apply for a loan from financial institutions and reputed NBFCs such as Bajaj Finserv and avail tax benefits on personal loans as well as multiple borrower-friendly features. They also provide pre-approved offers that make availing such loans quick and easy. These offers are also available on various other financial products such as home loans, loans against property, credit cards, etc. Check your pre-approved offer by providing only your name and mobile number.

Hence, keeping these above factors in mind, you can avail tax benefits on personal loans. You should preserve essential documents like sanction letter, transaction certificate, audit report, loan documents, etc. as you are required to submit adequate proof to the Income Tax authoritative bodies to be eligible for tax deduction.

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