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Personal loans are among the most accessible ways to raise finance for various purposes. For example, a personal loan can be a great help when you need to fund higher education, tackle a medical emergency or plan a large expense like a dream wedding. You can also claim personal loan interest deduction based on the purpose of the loan.
Personal loans are unsecured, and therefore lenders consider them riskier than secured loans. This means personal loans attract a higher interest rate. That said, the ease with which these loans can be availed and the freedom to use the amount for any purpose you like makes them ideal in many situations.
Remember that the personal loan amount that you raise is not a part of your income. This means you would not pay any income tax on the loan amount. That said, remember that this applies only when you take a loan from a bank or recognised NBFCs. If you take a loan from other sources like a family member – it may be considered a part of your income and can be taxed as such.
Before we discuss the tax benefits you can claim on personal loans, let us look at how to calculate the loan amount you are eligible for. The easiest way to do this is through our personal loan eligibility calculator. The loan amount that you can get depends upon your income, credit history, employment history, and repayment capacity. Our personal loan eligibility calculator would provide you with an instant estimate on the personal loan amount available based on:
Remember that this is just an indicative figure, and the actual amount that you are eligible for will be determined after a thorough check by the lender.
The tax benefits you can get on a personal loan depend on the purpose for which you are using the loan. The Income Tax Act offers tax deductions for specific purposes like education, construction or renovation of a residential property, purchase of a first home, business expansion, etc.
Personal loan tax exemption for salaried is available if the loan is used for financing the purchase, construction or renovation of a home. Section 24 of the Income Tax Act provides a tax exemption on the interest paid on the loan amount used for the purchase or construction of a piece of residential property. So, if you have taken on a personal loan to either buy or renovate your house, you can claim tax deductions under section 24(b).
If it is a house that you own and live in, you are eligible for deductions up to ₹2 lakh. If it is a rented house, the total interest paid on the loan can be deducted from your taxable income. Make sure that you keep all the relevant documents that prove how the loan amount was used before claiming the tax benefit.
If you use the loan amount to purchase an asset for your business, the interest paid on the loan becomes a part of your cost of acquisition. As this makes the asset costly, your capital gains on the asset would go down by the same amount. This, in turn, would result in lower tax liability. This makes personal loans a good choice when you need to purchase an asset on short notice to meet a business requirement.