5 times when you can avail tax benefits on personal loan

A personal loan is an unsecured open-ended loan that can be used to secure funds at short notice and bailout during an urgent situation. Since it’s not imperative for the borrower to disclose the purpose of availing a personal loan, it becomes all the easier to obtain as compared to other loans. Personal loans come handy in umpteen situations like medical emergency, up-gradation of home amenities, higher education, vacation expenses, debt consolidation, etc. However, home loans have an edge over personal loans when it comes to offering tax deductions and benefits because personal loans are generally used to meet contingencies, and take cover when the going gets tough.

5 times when you can avail tax benefits on personal loan

With proper knowledge, you can avail several tax benefits on a personal loan.
Source: Economic Times

Advantages of a personal loan:

  • Easy availability: Almost all banks and NBFCs provide personal loans for their customers. These loans are not much expensive and are available at cheap interest rates which makes them a lucrative option for many.
  • Minimal documentation: Higher your credit score, easier it is for you to avail a personal loan. Another striking feature of this loan is that it requires minimal documentation and is relatively less time-consuming.

Despite the instant relief and abatement of pressing emergencies, loans have to be repaid in due time with the allotted rate of interest, which is a quite cumbersome activity. Here comes the importance of tax benefits on personal loans. Before delving deeper into tax benefits, let us take a look at the financial tax slab for the current fiscal year.

Annual Income Range
Tax Rate
Up to Rs. 2.5 lakhs
No Tax
Above Rs. 2.5 lakhs to Rs. 5 lakhs
5% + 4% cess
Above Rs. 5 lakhs to Rs. 10 lakhs
20% + 4% cess
Above Rs. 10 lakhs to Rs. 50 lakhs
30% + 4% cess
Above Rs. 50 lakhs to Rs. 1 crore
30% + 10% surcharge + 4% cess
Above Rs. 1 crore
30% +15% surcharge + 4% cess

Is personal loan taxable in our country?

As per the general protocol, the principal amount and interest charges cannot be deducted for tax exemptions and are non-taxable, i.e., it does not make its way into the taxable income while filing your income tax returns, provided, that it is borrowed from a valid lender like banks, NBFCs, etc.
When we apply for personal loan from informal sources like friends or unknown vendors, then it is considered as a part of our income and becomes taxable.

Tax benefits offered in personal loans in India- 

A person availing a personal loan is not completely aloof to benefits on the repayment of the loan. The Income Tax Act does not mention any specific section for tax benefits on personal loans. On the contrary, the purpose of the loan is taken into consideration while determining the applicability of tax benefits.

As per the Act, one can enjoy income tax deductions on the interest charges if the amount is used for any of the following reasons:

- Personal loan for renovation or improvement of residential property: 

Let us consider that your residence needs repairs or renovations like the building of a new balcony, adding a room or a floor to your house, extending existing rooms, painting of the house, relaying of tiles, and you avail a personal loan for meeting the expenses. In such cases, you can enjoy tax deductions on the interest component of your personal loan. Under this section, the maximum limit for a claim for deduction is Rs. 30,000 a year for self-occupied properties and Rs. 2,00,000 a year for a let-out property. Make sure to store and produce all your receipts and bills as definitive proof showing that the loan amount has been allocated for home renovation. The principal amount of personal loan taken for the home renovation is eligible for a tax deduction under Section 80C of this act.

- Personal loan for construction of residential property:

If you avail a personal loan for covering the expenses of construction or purchase of residential property then the interest component of the loan can be claimed for tax deductions under Section 24. It is a common misconception that only home loans qualify for this type of tax reduction. The maximum amount allowed for deduction is Rs. 2,00,000 if the property is self-occupied. There is no limit in case the property is on rent. However, this tax benefit is applicable only if you reside in the house you constructed.

- Personal loan for business purpose:

One can borrow a personal loan to meet fund requirements for business purposes like stock inventory, paying salaries, purchasing pieces of equipment, expansion of the scope of the company, etc. The interest component in such cases is considered a business expense and can be deducted from the gross profit of your business. This reduces your tax liabilities, and there is not even an upper limit on the amount of exemption.

- Personal loan for the purchase of any asset:

One can also take advantage of tax benefits while purchasing an immovable asset like property, land or jewellery. In such purchases, the interest paid for the personal loan is added to the total cost of purchasing the asset. One only enjoys tax deductions at the time of selling the asset and not during the purchase. This leads to the overall reduction of capital gains liability and taxes. There is no upper limit on the amount of tax exemption in this case too.

Important points while availing tax benefits on personal loans:

Personal loans are quite easy to obtain provided the customer is aware of some basic procedures and protocols and follows them religiously. The below points are important to bear in mind while opting personal loans:

  • A personal loan is non-taxable as the amount is not a part of your regular income.
  • If you want to reap the tax benefits on the interest paid then you need to submit adequate proof to the income tax department to support your claim.
  • The following documents must be kept handy at all times:
  1. Sanction letter
  2. Auditor’s report
  3. Expense vouchers
  4. Bank certificate
  5. Necessary receipts and bills.

Although a personal loan is not a tax-saving instrument as such, one becomes eligible for tax reductions based on the purpose of availing the loan. One must make efforts to educate oneself with the rules and norms laid down by the government, and the latest facts and figures to reap the maximum out of a formidable situation. Nowadays online forums provide updated information and assure the borrower of a hassle-free, quick, and user-friendly interface with their range of myriad personal loan plans.

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