3 Possible Cases When Borrowers Can Avail Tax Benefits On A Personal Loan

A personal loan is a crucial financial tool that can lend you the required funds at the time of need. A personal loan can help you in any emergency. Personal loans are unsecured loans; thus, you need to pay higher interest rates. Since personal loans are not a part of your income, they are not taxable. 

Yes, you heard it right. You can enjoy tax benefits on personal loans. Indian Income Tax Act exempts personal loans of any tax deductions. Here is a description of it.

Tax Benefits on a Personal Loan:

There are three prominent cases when borrowers can avail of tax benefits on personal loans. 

Let’s throw some light on three important cases that qualify for a tax rebate as per the Income Tax Act, 1961:

  • Personal loan as an investment in your business:

Many entrepreneurs and business people apply for a personal loan rather than a business loan. There are two main reasons for this:

    1. The personal loan gets approved faster than the business loan.

    2. And the key reason is that the interest paid can be claimed as the expenses and deducted from the company’s net profits. Thus, lowering the tax liability of the borrower.

In the case of a sole proprietorship, the same principle applies. The interest paid is claimed as business expenses, which are dedicated to the gross receipts. It reduces the tax outgo.

  • Personal loan for the construction or purchase of a house:

The borrower can avail of the tax benefits on personal loans when he offers proof that the money borrowed is for purchasing or constructing a home.

    1. You can claim tax redemption under sec 24(b) of the Income Tax Rules. However, the higher limit is Rs. 2,00,000 if you own the house and live in it.

    2. There is no specific cap if the house is rented out.

Additionally, you can bail yourself of the tax if you take a personal loan for investment in assets like jewelry, non-residential property, shares, etc. Worry not if you cannot afford to invest in some assets. You can do so by taking a personal loan. You can invest, and at the same time, you are free from the tension of high taxes.

  1. The main point is that the borrower cannot claim the tax benefits the same year or the year of acquisition. But, he/she can enjoy tax benefits in the year if he/she sells out the property.

  2. It’s important to note here that the tax deduction will be applicable only to the interest amount and not on the principal.

  3. A borrower will not be able to enjoy tax benefits if the personal loan taken is applied for any purpose other than mentioned above.

  • Personal loan for funding education:

Nowadays, education is a costly affair. Providing higher education in a reputed college or university is not a cheap game. It requires good funds. 

A common man must borrow loans to offer the best education to his wards. Hence, the personal loan comes to the rescue in such a scenario.

Borrowers can avail of tax benefits on personal loans for education on up to Rs 1.5 lakhs under sec 80E of the Income Tax Act. The funding amount has to be for the education of anybody like his spouse or children or himself. There are two criteria for tax exemption like:

  1. The loan borrowed should be for higher education.

  2. The tax deductions are applicable on the interest amount and not on the principal loan amount.

  3. The borrower should be the legal guardian of the student to avail of the tax benefits.

Few relevant points regarding tax benefits on a personal loan

We all take a personal loan at some point in time in our life. Being a layman, unaware of laws and regulations laid down by the government, you can be misguided, and hence you can be at a loss. 

Read below to find out a few important points you need to know when taking a personal loan:

  • A personal loan raised is not a part of the income of the borrower. Hence, no tax is levied on the loan.

  • Not all kinds of personal loans are eligible for tax deductions. The tax benefits and the extent of redemption depend upon the purpose of the loan borrowed. Thus, you need to produce proper evidence and personal loan documents to prove the purpose without which you may not enjoy the tax benefits.
  • To enjoy the tax benefits on personal loans, you need to correctly maintain all the personal loan documents and other records like the amount of loan taken, interest to be paid, and other relevant documents.

Final words:

Borrowing a loan and interest to be paid can be worrisome. But knowing proper laws and easing out your worries. You can easily avail of the tax benefits on personal loans if you are aware of the rules and regulations laid down. I hope this article gave you useful insights into the cases where you can avail of tax benefits and be at peace. 

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