Tax Benefits on Personal Loans

Many of us may need to get a personal loan at some point in our lives. Personal loans can come to your rescue when you need an extra hand to finance the important milestones in your life like funding your higher education, starting a new venture, or getting married. Or these loans can help you overcome tough situations like medical emergencies. 

It is commonly believed that interest paid on personal loans is not tax deductible as the loan amount is not a part of your income. However, there are certain circumstances under which you can receive tax benefits on your loan. This will depend on what you utilise the loan for. Under the Income Tax (IT) Act, 1961, you can take advantage of tax benefits in the following cases: 

Personal Loan for Home Renovation and Purchase 

To ensure that your home is in a good condition, you take extensive care of all the fixtures and fittings of your house. The roof, light fixtures, pipes, tiles, etc. require regular maintenance. By renovating your house occasionally, you can make sure that your house is well-maintained. A personal loan can help you arrange funds for the renovation of your home. Under Section 80C of the IT Act, up to ₹1.5 Lakhs of the loan taken for home improvement, is eligible for tax exemption. 

If you use the loan amount to renovate your home, you are eligible for a tax reduction of up to ₹30,000 on the interest payable. However, if you utilise a personal loan to make rental payments, you are can claim the entire interest amount as a tax benefit. 

You can also claim tax benefits if you utilise your personal loan to purchase or build your home under Section 24.  When you take a loan for either of the above given purposes then the interest you pay, can be deducted from the net taxable income or net annual value of your property. For a self-owned property, you can get a tax relief of up to ₹2 Lakh. 

Personal Loan for Business 

While there are dedicated loans that you can avail for growing your business, you can also opt for a personal loan for your business requirements. If you invest the personal loan into your business, the interest you pay on this loan becomes a business expense. This interest can be deducted from your gross revenue (net taxable profit), thereby reducing your overall tax liability. Also, there is no upper limit for the amount you can claim for tax benefit under this category. 

Personal Loan for Investments 

Besides residential property, there are many other income-producing assets you may want to invest in, such as shares or gold. If you use a personal loan to invest in these assets, there is a way to get personal loan tax benefits. However, you will not be able to claim a tax benefit on the interest amount right away. Rather, the interest applicable on the loan amount invested in an asset, gets added to the cost of asset acquisition. This lowers your total profit. Hence, as the invested value increases, the tax payable on the gains reduces when the asset is sold.  

Things To Consider While Availing Tax Benefit on Personal Loan 

You are not required to pay any tax on your personal loans as they are not a part of your income. However, this case is only valid if your loan source is authentic and reliable. For this, you will have to provide sufficient proof to the income tax department to support your claim. Make sure that you keep all the documents required for personal loan readily available beforehand. This will help you avoid any inconveniences later on. 

PL Tax Exemption Required Documents: 

1. Sanction Letter

The official letter provided by the lending bank which states that your loan has been approved. 

2. Expense Vouchers

This document is created when an expense has been paid. You can show this voucher to prove that your debt has been paid.  

3. Auditor’s Report

An audit is conducted when applying for a loan to check your credibility and collect all the required documents. The auditor further assists in the disbursal and monitoring of the loan. Hence, the auditor’s report is essential to claim your tax benefits.  

4. Bank Certificate

This document confirms that you have a loan account with the bank and the value of the funds that it holds.  

Remember, you must retain all official documentation as proof to claim tax benefits on your personal loan.   

We hope this has helped you understand the taxation policy a little better. Make use of section 80C under the Income Tax Act, 1961, and save up on tax via personal loans. Turn your liabilities into assets and make the most of the provisions to reduce your taxes.  And if you’re looking to take out a personal loan, look no further, go on to the Bajaj Markets website or app. Look at the wide range of options available and choose the plan that fits your needs the best! Check them out now!