How to Avail Tax Benefits On Personal Loan?

Jan 29, 2020

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.

Is the Personal Loan Amount Taxable?

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.

Tax Benefits on Personal Loans

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.

1. Personal Loan for Your Home

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.

2. Personal Loan For Business Purpose

If you utilize the loan amount for commercial interest, whether initiating or expanding the business or merely to meet the daily working capital requirements, the loan amount invested will be considered a business expense. The interest paid can be deducted from profit before determining the tax liability, thus reducing the gross revenue or net taxable income, thereby inevitably decreasing your tax liability. Also, there is no maximum limit or upper ceiling for the amount you can claim as a deduction. Hence, if used prudently, it can be a considerable tax saving option.

3. Personal Loan for Purchase of any other Asset

Besides residential property, there are various income-producing or investing assets like shares, gold, jewellery, or non-residential house property. If you satiate your loan amount to invest in these assets, there is no conceivable way to avail personal loan tax benefits. You will not be eligible to claim a tax deduction on the interest amount right away. However, the interest that accumulates on the loan amount invested in purchasing such assets gets added to the cost of acquisition. At the time of selling these assets, the interest accrued added to the cost of acquisition lowers the capital tax gains, thereby reducing the tax liability.

4. Personal Loan for Home Improvement

To maintain and preserve your property in prime condition, you must take care of the fixtures and fittings. Every constituent of the house must be well-maintained, be it the roof, light, tiles, pipes, etc. Under Section 24, you can claim a tax deduction on the interest components up to Rs 2 lakhs. However, you can claim tax deduction under section 80 C up to Rs 1,50,000 every year from your taxable income on the principal repayment of the loan.

Points to Remember

  1. A personal loan is not considered a part of your income and is, therefore, not taxable.
  2. Tax benefits on personal loans can only be claimed for specific reasons such as purchase or renovation of property, etc.
  3. If you wish to claim tax benefit on the interest paid on your personal loan, you will have to provide adequate proof to support your claim to the income tax authorities.
  4. At the very minimum, you would need the following to claim a tax benefit:
    1. Loan sanction letter
    2. Expense vouchers
    3. Auditor’s report
    4. Bank certificate

How to Calculate Personal Loan Eligibility?

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:

  1. Your location
  2. 2. Your age – you should be at least 21 years old at the time of application and not more than 65 years old on loan maturity
  3. 3. Your net monthly income. Remember this is your income after the tax has been deducted. In case you are self-employed, your profit after tax would be used instead
  4. Any monthly EMIs that you are currently paying

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.

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