A personal loan is an unsecured open-ended loan that can be used to secure funds at short notice and bail out during an urgent situation. Since the borrower doesn’t need to disclose the purpose of a personal loan, it becomes all the easier to obtain than other loans. Personal loans come in handy in umpteen situations like medical emergencies, up-gradation of home amenities, higher education, vacation expenses, debt consolidation, etc. However, home loans have an edge over personal loans when offering tax deductions and benefits because personal loans are generally used to meet contingencies and take cover when the going gets tough.
With proper knowledge, you can avail yourself of several tax benefits on a personal loan.
Source: Economic Times
Advantages Of A Personal Loan
● Easy availability:
Almost all banks and NBFCs provide personal loans for their customers. These loans are not expensive and are available at cheap interest rates, making them a lucrative option for many.
● Minimal documentation: The higher your credit score, the easier it is to avail of a personal loan. Another striking feature of this loan is that it requires minimal documentation and is relatively less time-consuming.
Despite the instant relief and reduction of pressing emergencies, loans have to be repaid in due time with the allotted rate of interest, which is quite a cumbersome activity. Here comes the importance of tax benefits on personal loans. Before delving deeper into tax benefits, let us take a look at the financial tax slab for the current fiscal year.
As per the general protocol, the principal amount and interest charges cannot be deducted for tax exemptions and are not taxable, meaning that they do not appear on your income tax return as taxable income, provided it is borrowed from a valid lender like a bank, NBFC, etc.
When we apply for personal loans from informal sources like friends or unknown vendors, it is considered a part of our income and becomes taxable.
Tax Benefits Offered In Personal Loans In India
A person availing of a personal loan is only partially eligible for benefits on the repayment. The Income Tax Act does not mention any specific section for tax benefits on personal loans. On the contrary, the loan's purpose is considered while determining the applicability of tax benefits.
As per the Act, one can enjoy income tax deductions on the interest charges if the amount is used for any of the following reasons:
Personal Loan For Renovation Or Improvement Of Residential Property
Let us consider that your residence needs repairs or renovations like building a new balcony, adding a room or a floor to your house, extending existing rooms, painting the house, relaying tiles, and you avail a personal loan for meeting the expenses. In such cases, you can enjoy tax deductions on the interest component of your personal loan.
Under this section, the maximum limit for a claim for deduction is Rs 30,000 a year for self-occupied properties and Rs. 2,00,000 per year for a let-out property. Keep all receipts and bills to prove the loan amount was allocated for home renovations. The principal amount of the personal loan taken for the home renovation is eligible for a tax deduction under
Personal Loan For Construction Of Residential Property
Suppose you avail of a personal loan to cover the expenses of construction or purchase of residential property. In that case, the interest component of the loan can be claimed for tax deductions under Section 24. It is a common misconception that only home loans qualify for this type of tax reduction. The deduction limit is Rs. 2,00,000 if the property is self-occupied. There is no limit in case the property is on rent. However, this tax benefit is applicable only if you reside in the house you constructed.
Personal Loan For Business Purposes
One can borrow a personal loan to meet fund requirements for business purposes like stock inventory, paying salaries, purchasing equipment, expanding the company's scope, etc. The interest component in such cases is considered a business expense and can be deducted from the gross profit of your business. This reduces your tax liabilities, and there is not even an upper limit on the exemption amount.
Personal Loan For The Purchase Of Any Asset
One can also take advantage of tax benefits while purchasing an immovable asset like property, land, or jewelry. In such purchases, the interest paid for the personal loan is added to the asset's total cost. In such purchases, the interest paid for the personal loan is added to the asset's total cost. One only enjoys tax deductions when selling the asset and not during the purchase. This leads to an overall reduction of capital gains liability and taxes. In this case, there is no upper limit on the tax exemption amount, too.
Important Points While Availing Tax Benefits On Personal Loans
Personal loans are quite easy to obtain, provided the customer knows some basic procedures and protocols and follows them religiously. The points below are essential to bear in mind while opting for personal loans:
- A personal loan is non-taxable as the amount is not a part of your regular income.
- To reap the tax benefits on the interest paid, you must submit adequate proof to the income tax department to support your claim.
- The following documents must be kept handy at all times:
1. Sanction letter
2. Auditor’s report
3. Expense vouchers
4. Bank certificate
5. Necessary receipts and bills.
Though a personal loan is not a tax-saving instrument per se, one becomes eligible for tax deductions based on the purpose of availing the loan. One has to make an effort to get acquainted with the rules and norms laid down by the government and the latest facts and figures to get the maximum out of a formidable situation. Nowadays, various personal loan plans are available on online forums that provide updated information and offer a hassle-free, fast, and user-friendly interface.
