Tax Benefit On Business Loan

Tax Benefits on Business Loan in India

19 Aug 2020

Capital is the lifeblood of every business and one of the prominent sources of capital to expand operations, promote business, or purchase new inventory is availing a business loan. While a loan, if mismanaged, may prove to be an impediment in running a business, the benefits include tax benefits on the interest paid to the lender.

Tax Benefits Provided By The Tax Authorities of India

1. Interest Paid on Business Loans

The amount paid back to the lender in the form of interest is tax-deductible. A tax deduction in finance parlance refers to the deduction that lowers a person's tax liability by lowering their taxable income. Besides, the business expenses that are used to grow the business is also tax-deductible.

In essence, borrowers can benefit from a business loan as they can deduct the interest amount from the business expenditure to arrive at the taxable amount. It is thus an effective tool for Micro, Small and Medium Enterprises (MSMEs) to lower the tax liability and use the funds for expanding the business.

The principal amount availed from the lender is, however, not tax-deductible.

2. Business Expenses

Business expenses that are incurred to run and maintain operations can also be subtracted from the overall business revenue to arrive at the taxable income. Below is the list of business expenses that are not a part of business revenue. (Gross Revenue - Tax-deductible Expenses = Taxable income)

  • Wages paid to the employee
  • Office rental cost of the office premises
  • Office supplies such as stationery
  • Expenses incurred on the insurance of business
  • Advertising and marketing expenses
  • Bonus paid to the employees

Important Points for Tax Benefit On Business Loans

  • Any business loan, whether term loan, working capital loan, bill discounting, tax benefits, microloan, small business loan, equipment finance, letter of credit, and interest paid on the principal amount, is considered tax-deductible.
  • The personal loan available for a business is also tax-deductible.
  • If the payment is in the form of EMI, which constitutes the part of the principal amount as well as the interest, only the interest amount will be tax-deductible and not the entire EMI. One can seek help from a professional financier to understand the interest component in the equated monthly instalments.

FAQs on Business Loans Tax Deduction

1. What is a business loan interest? Is the principal amount of my business loan considered as an income?

The interest accrued on the loan amount availed by the business owner to run and expand business activities is known as business loan interest rate.

No, the principal amount doesn’t form the income part of the business. Only the interest paid on a business loan is a tax-deductible expense.

2. Will I get a tax deduction if I intend to buy another business?

Buying a business can either be in way of investment or meant to support another business enterprise. If the business bought is used to run the business actively, then the interest on the loan amount will be tax-deductible. However, if you do not intend to keep the business operational, the interest amount will not be tax-deductible.

3. Is business refinance considered tax-deductible?

When a business or individual decides to refinance a credit obligation, they wish to make revisions in their interest rate, payment schedule or any other term in the contract. Refinancing can help save money in the long term, but if the money of the second loan is used to pay back the first lender, it won't be considered a business expense and the interest paid for the first loan will not be tax-deductible. However, the interest paid back on the second loan will be tax-deductible.

Business loans can prove to be a turning point for an entrepreneur or a seasoned business owner. The capital can either be used to expand operations or set up a new business and the tax benefit on business loan via interest payment and certain business expenses such as wages or bonus paid to employees can make the decision to avail a business loan, a quick one. Entrepreneurs can apply for a Bajaj Finserv Business loan, available on Finserv Markets, which is simple and easy. Your loan application on Finserv MARKETS can be approved in just 3 minutes and the whole process requires minimal documentation.

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