Tax Benefits on Personal Loans

Personal Loans are unsecured loans offered by many banks, non-banking financial companies (NBFCs), fintech companies, and other financial institutions. The quick and hassle-free processing of these loans has made them a very popular product. Another reason for their popularity is that these loans do not require any collateral security. However, the loans are sanctioned on verification of income stability, job stability, credit score, repayment capacity, and the borrower's existing commitments.

People's aspirations for a better lifestyle and the fact that there can be an unexpected cash requirement anytime, has created a constant demand for quick funds. Be it a wedding, a vacation, education abroad, or construction of a house; the requirement of additional cash is often there. These days, medical treatments are also very expensive. Sometimes all the savings and the insurance may not be sufficient to fund a treatment. At such times the only quick and hassle-free source you can depend upon is the Personal Loan.

You can avail Personal Loans to the extent of 50 Lakhs depending on your income, repayment capacity, and the financial institution you choose. However, when you take a big-ticket loan, you are likely to set aside most of your monthly income to repay the loan through your equated monthly instalments (EMIs). Availability of tax deduction for such loans will help reduce the monetary burden to that extent.

Under such circumstances, it is fair enough for you to expect the availability of tax deduction for such a big-ticket loan to save the funds out going to that extent.

Is Tax Deduction for Personal Loan Possible in India?

Depending on the repayment capacity, the extent of Personal Loan that you can get is as large as 50 Lakhs. Considering the quantum ticket size of the loan, it is natural to wonder if the tax benefit is available for this loan.

However, unlike the large ticket loans like Home Loans and education loans which can be used as tax saving instruments, there is no provision for tax exemption under the Indian Income Tax Act for Personal Loans. At the same time, the interest on the Personal Loans is exempt from tax under Section 24(b) of the Income Tax Act depending on the purpose for which the Personal Loan is utilised.

Conditions When You Can Claim Tax Benefit on Personal Loans

Tax exemption under the Indian Income Tax Act allowed for Personal Loans depending upon the end use. It should also be noted that the Personal Loan should be availed through proper channel if you wish to claim tax exemption. Exemption on the interest paid on Personal Loans is available if the loan is utilised for the following purposes:

For the construction of a residential property

If the Personal Loan is used for the construction of residential property tax exemption can be claimed under Section 24(b) of the Income Tax Act for the interest component of the loan. In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction under section 24(b) However, in case of a self- occupied property, the limit is 2 Lakhs.

For renovation/repairs of existing residential property

If the Personal Loan is used for renovation/repair of the existing residential property then you can claim tax benefit for the interest component on the loan to the extent of 30,000. For this you will be required to provide necessary documents to prove that the loan is utilised for repairs/renovation of the property.

There is no maximum limit on the quantum of interest which can be claimed as deduction under Section 24(b) if the property is let-out. The limit fixed for claiming the exemption in case of the self-occupied house is 30,000.

For business purpose

If the proceeds of the Personal Loan are used for business purposes the interest paid towards the loan can be treated as an expense. This can be deducted from the taxable income. The taxable income in business terms is the Company's profit and gross revenue. The interest component of the Personal Loan can be deducted from the Company's net profit. With this the taxable income will be reduced which in-turn will reduce the tax liability. Under this provision there is no limit on the quantum to claim exemption.

For purchase of an asset

If the Personal Loan is utilised for purchase of an asset like shares, jewellery, or non-residential property, the amount of interest paid on the Personal Loan will be added to the cost of acquiring the asset.

The benefit of tax deduction will not be available immediately in the year when the asset is purchased but will be added to the cost of acquiring the asset and the tax benefit will be allowed in the year when the asset is sold. Adding the interest paid on Personal Loan to the cost of acquiring the asset will increase the value of the asset. This will reduce the capital gains liability when the asset is sold. There is no limit on the quantum to claim tax exemption under this provision.

Personal Loans per se are not tax saving instruments unlike Home Loans or education loans. Tax benefit can be availed if the loan utilised for the purposes mentioned under Section 24(b) of the Indian Income Tax Act, i.e., for construction of a residential property, for renovation/repair of residential property, for purchase of an asset, or for business purposes.

Tax benefit can be availed if utilised for the purpose mentioned under Section 24(b) of the Indian Income Tax Act.

How to Claim Tax Benefits on Personal Loans?

Proceeds of Personal Loan are not considered as income and hence, they are not taxable. However, you can claim tax benefit on the interest paid towards Personal Loans when utilised for the purpose mentioned in Section 24(b) of the Indian Income Tax Act.

To claim tax benefit on Personal Loans:

  • You should submit adequate proof to the income tax authorities. You should either submit a bank certificate or auditor's certificate to prove the purpose for which Personal Loan was utilised.
  • You should keep copies of important documents like sanction letter, bills, auditor's report, and bank certificate which you will have to submit to income tax authorities for assessment.

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