Many of us may need to avail a personal loan at some point in our lives. Personal loans can come to your rescue when you need financing for the important milestones in your life — funding your higher education, starting a new venture, or getting married. It can help you overcome tough times, like a medical emergency also.
It is commonly believed that interest paid on personal loans is not tax deductible since the loan amount is not considered a part of your income. However, there are certain circumstances under which you can avail tax benefits on your loan. For this, the purpose towards which the loan amount is utilized is taken into consideration. Under the Income Tax Act, you can take advantage of tax benefits in these cases:
Purchase, construction or renovation of residential property
Under Section 24, which deals with tax deductions for homeowners, you can claim tax benefits from your loan if you use the amount to purchase, build, or renovate your home. Any interest that you accrue from borrowed capital that is used for the purpose of acquiring, building or renovating your home is deductible from the net income or net annual value of your property.
For a self-owned property, you can claim a deduction up to Rs 2 lakh. If you use the loan amount to renew or renovate your home, you are eligible for a tax deduction of up to Rs 30,000. However, if you utilize a personal loan towards a rented home, you are eligible to claim the entire interest amount as a deduction.
Make sure that you retain all the necessary documentation as proof. You will need to produce an authorized certificate from your bank confirming that the personal loan was used towards your residential property.
Investing in your business
While there are dedicated loans that you can avail for growing your business, like the Bajaj Finserv Business Loan available on Bajaj Finserv MARKETS, you can also opt for a personal loan for your business requirements. In such a case, where you invest the loan amount into your business, the interest you pay on this loan will be considered 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 ceiling for the amount you can claim as a tax deduction and terms for GST on Loans are totally different.
Here is a quick and handy guide that summarizes the points above and gives you a glimpse of your tax benefit on personal loan:
Personal Loan Tax Exemption Table
|End Use of Personal Loan||Tax treatment of interest expense||Implications for the borrower||Exemption Limit|
|For business||Allowable as an expense from the profit of the borrower’s business before calculating tax||Tax liability reduced as per applicable marginal tax rate||No limit|
|For the construction of a residential property||Allowed as a deduction from Net Annual Value (Net Income) of the residential property||Tax liability reduced as per applicable marginal tax rate||Up to 2,00,000|
|For purchase of any other asset||Not allowable in the year in which interest is paid. Interest expense gets added to the cost of acquisition of the asset at the time of sale of an asset, thus reducing capital gains||Tax liability reduced in the year of sale of asset as per applicable capital gains tax rate (short term or long term)||No limit|
Investing in other assets
Besides residential property, there are many other incoming-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 avail tax benefits. However, you will not be able to claim a tax deduction on the interest amount right away. Rather, the interest that you accrue on the loan that you invest in an asset gets added to the cost of acquisition. At a time when you’re selling this asset, the interest amount included in your acquisition cost lowers your capital gains, and therefore your capital gains tax liability is reduced on the sale transaction.
Remember, you must retain all official documentation as proof to be able to claim your deduction on your loan. You may need to submit your loan sanction letter, expense vouchers, and authorized certificates from your bank and auditor to income tax authorities for assessment.
And if you’re looking to take out a personal loan, look no further than the Bajaj Finserv Personal Loan, available on Bajaj Finserv MARKETS. Borrow up to Rs 25 lakh with no requirement to put up collateral. All you have to do is meet the simple eligibility requirements, submit basic documents, and get instant approval and money in your bank within 24 hours! You can also avail the Flexi Loan option, and reduce your EMI by up to 45%. And now that you know you can claim tax benefits in certain cases, there’s no more reason to stall on buying that house or starting that business!
Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!