Tax Benefits on Personal Loans

Posted in Lending Articles By Sajhyadri Chattopadhyay-

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Before we look for tax benefits on personal loans, let's try to answer this question - is the amount of personal loan taxable? When you take a personal loan, it is considered a liability, and therefore, it is not treated as income. After all, you are expected to ultimately repay the borrowed amount. Similarly, the interest you pay on a personal loan is also not tax deductible, unless the loan is utilised for some specific purposes. Let's see what they are.

How to Save Tax on Personal Loans

Personal loans and tax benefits are often considered poles apart from each other. However, there are a few tax benefits available, depending on the following end uses of personal loans –

Construction or Purchase of Residential Property:

If you take a personal loan to purchase or construct a residential property, you can claim tax benefits under Section 24 (b) of the Income Tax Act, 1961. This provision allows deductions of up to ₹2 Lakhs on the interest paid for your personal loan. However, remember that only the owner of the property can claim these benefits. For rent-out properties, the entire interest component of the loan will be eligible for a tax deduction.

Home Renovation Expenses:

If you utilise a personal loan to renovate your home, you can claim a deduction of up to ₹30,000 on the interest paid, as per Section 24 (b). However, this benefit is specifically for renovation and not for general repairs or maintenance. Additionally, if you claim these benefits you can only sell your house after five years of buying. If you sell the property, you are legally bound to repay the claimed exemptions in the same financial year.

Business Investment:

Personal loans taken for starting a business or for business-related investments, such as purchasing assets like machinery or equipment, offer tax benefits. These are available on the interest paid under Section 36 (1) (iii) of the Income Tax Act, because interest payments are considered as a business expense. Plus, you can claim tax deductions on the entire interest paid. However, you must maintain clear documentation highlighting that the personal loan has been utilised for such business expenses.

Education Expenses:

Personal loans used for funding education expenses, including tuition fees and related costs, can provide tax benefits. The total interest paid for the loan is eligible for deduction under Section 80E. This is applicable for higher education for yourself, your spouse, or your children. Remember that you can claim this deduction until the loan is repaid or for a maximum of eight years, whichever is earlier.

Purchasing Other Forms of Assets:

You can get tax exemption on a personal loan if you use the money to purchase assets like stocks, shares, jewellery, non-residential properties, etc. This is also available only on the interest component of the loan as it can be considered part of the asset's cost of acquisition. This helps to reduce the capital gains when selling the asset. However, you cannot claim these deductions while paying the interest. Instead, you can claim tax benefits when you sell the asset.

It's crucial to note that you must maintain proper documentation, including loan agreements, receipts, and proof of utilisation when claiming tax benefits on personal loans.

Do Personal Loans Come Under Section 80C for Tax Exemptions

You can get tax benefits under section 80C in certain cases, depending on the end use of a personal loan. Under Section 80C, you are eligible for tax deductions on the principal repayment of a personal loan only if it is used for buying, construction, or renovating a home.

In such cases, you can claim tax benefits of up to ₹1.5 Lakhs in a single financial year, over and above the other tax benefits for interest payments under Section 24(b) as mentioned previously. However, you cannot sell your property before five years from the date of purchase. Additionally, you can use a personal loan EMI calculator to stay on top of your monthly payments and not miss deadlines.

Which Loans are Exempted from Income Tax in India

Only certain loans in India may provide exemptions or deductions under the Income Tax Act.

Home Loan:

Principal Repayment: Eligible for deductions under Section 80C.

Interest Payment: Eligible for deductions under Section 24(b) for self-occupied properties and under Section 80EEA for properties under affordable housing segment.

Education Loan:

Interest Payment: Eligible for deductions under Section 80E for interest paid on loans taken for higher education.

Business Loans:

Interest Payment: Interest paid on loans taken for business purposes may be eligible for deductions as a business expense.

Agricultural Loans:

Interest Payment: Interest paid on loans taken for agricultural purposes may be eligible for deductions under Section 80P.

Tax laws are subject to change, and it's advisable to consult with a tax professional or refer to the latest guidelines from the Income Tax Department for the most accurate and up-to-date information.

Personal loans are a great option to meet your quick financing needs, owing to their flexibility, quick approval, and unrestricted use of funds. On top of those facilities, if you can claim tax benefits on personal loans depending on specific end-use cases, it just seals the deal! So why wait? Meet your needs for urgent cash via a hassle-free online application process on Bajaj Markets.