As a part of the working population, we all look for various ways to avail of tax benefits in order to save money.
Being aware of the different types of loans and their pros and cons help determine which one would be the best option for you. Different types of loans like personal loan helps to avail tax benefits.
Why Opt for a Personal Loan?
A personal loan is a simple method to avail finances for different needs without having to wait for too long. Be it funding for higher education, planning your wedding, or handling a medical emergency – instant personal loans are the ones that always come to your aid.
Although the interest rates on personal loans are higher than the other types of loans, they are still the choice of a majority of individuals, since they are more easily accessible by one and all.
However, no tax deductions or exemptions are allowed on personal loans as per the Indian Income Tax Act. This turns out to be a drawback for people when opting for the otherwise beneficial personal loan.
Can You Claim Tax Benefits on Personal Loans?
Having stated the fact that tax deductions are not allowed on personal loans, one might consider looking at other options, such as education or home loans, to obtain tax benefits. The good news is that there are particular instances in which you can avail tax benefits on personal loans. If you meet one of the below-mentioned conditions, you could easily draw the benefits of a personal loan and, at the same time, enjoy tax savings.
We have enlisted multiple ways by which a personal loan can qualify for tax benefits:
Personal loans for business:
If the personal loan amount has been invested for a business purpose, the interest paid on the loan can be declared as an expense. The interest that you spend can be deducted from the profit before determining the tax liability. This will reduce your capital gains, thus reducing the tax liability. There is no upper limit on the interest amount that can be claimed in this case.
Personal loans for residential property:
If the loan amount has been used to construct or purchase a property, you can claim tax benefits. Under Section 24 of the IT Act, if you borrow money via a personal loan, you will be eligible for tax deductions on the repayment of the interest amount.
For a self-occupied house, the maximum amount that can be deducted is INR 200,000. Whereas, for a rented house, there is no cap on the maximum amount that can be claimed. To claim the deduction, you need to ensure that you have saved all the related documents to prove that you used the loan amount for the purchase or construction of the property.
Personal loans for the purchase of assets:
If the loan amount has been availed for investing in assets other than property, such as shares, stocks or jewelry, you can avail tax deductions. In this case, the amount of interest paid during the year is not an allowable expense. Hence, this amount gets added to the cost of acquisition and in turn, reduces the capital gains and therefore, the tax liability.
Please note that the tax deduction can be applied only on the interest amount and not on the principal loan amount.
Personal loans for home improvement:
As per Section 80C, you can claim for a deduction of up to INR 150,000 of the loan amount. The principal amount taken for home improvement is eligible for deduction under Section 80C of the Income Tax Act.
Generally, a personal loan is not taxable. Therefore, when opting for personal loans online, you may not enjoy the tax benefits that are available on other loans, such as education or home loans. However, you could become eligible for claiming tax deductions on the interest paid on the personal loan if you submit adequate proof to the income tax authorities. Remember to keep your certificate safe to claim your tax benefits from the NBFC or financial institutions. A copy of all the important documents, including the sanction letter, auditor’s report, certificate and expense vouchers, must be kept safe at all times.