Indian Income Tax Act allows for various tax deductions and exemptions on interest expenses and principal repayment for an education loan or a home loan. However, there are no tax deductions or exemptions allowed on personal loans. Deduction on interest expense of personal loan is available in certain circumstances based on the purpose for which the loan has been availed.
Tax Benefit available on Personal Loans
Different Tax Benefits can be availed for personal loans. Before we define the tax benefits we must mention what is a personal loan. A personal loan is availed when a borrower requires money. He applies to commercial banks. Upon acceptance, the loan is granted to the borrower. There are different purposes to which personal loans can be out. Following are the tax benefits available for personal loans-
Tax Treatment- Allowable as a tax-deductible expense from a profit of the borrower’s business before calculating tax
Borrower Implication- Tax liability reduced as per applicable marginal tax rate
Exemption Limit- No Limit
For the construction of Residential Property
Tax Treatment- Allowed as a deduction from Net Annual Value (Net Income) of the residential property.
Borrower Implication- Tax liability reduced as per applicable marginal tax rate.
Exemption Limit- Up to ₹ 2,00,000
For purchase of an asset
Tax Treatment- Not allowable in the year in which interest is paid. Interest expense gets added to the cost of acquisition of the asset at the time of sale of an asset, thus reducing capital gains.
Borrower Implication- Tax liability reduced in the year of sale of asset as per applicable capital gains tax rate (short term or long term)
Exemption Limit- No Limit
Different Purposes for which Personal Loan is utilized
A personal loan may be used to start a new business. Proceeds are generated from the personal loan. The proceeds can be further invested. Interest is payable on the loan amount. Tax is calculated on the Interest amount and deduction can be claimed. Interest can firstly be deducted from the tax payable amount. Since interest is deducted, the total tax liability reduces. With the reduction in total tax liability, the borrower has to pay less tax. There is no limit on the exemption of tax on the interest amount. Therefore utilizing this opportunity to reduce the tax payable amount is very very important.
For Residential Construction
If the proceeds of personal loans are used for construction or purchasing a house then the borrower can avail of tax deduction under section 24. Under section 24, if you take a loan for construction, purchase, or renovation of your house property, the interest accrued on the loan amount is allowed as a deduction. To claim the deduction, you need to submit a certificate issued from the borrower’s bank which certifies that they have been of the loan were utilized for construction, purchase, or renovation of the property.
For Purchase of Other Asset
If the personal loan has been availed for purchasing assets like shares, jewellery or non-residential house property, etc, the amount of interest paid during the year on such loan is not an allowable expense. However, the same gets added to the cost of acquisition of the asset, which reduces the capital gains on the asset at the time of its sale, thus reducing the capital gains tax liability on the sale transaction.
Importance of Tax Benefit on Personal Loan
When you are availing of a loan you must always keep in mind that you are taking a financial burden. You will have to pay a fixed interest on the loan amount. Moreover, you will have to repay the principal amount. If you fail to within the due date, the penalty will be charged. Moreover, you will have to pay a heavy fine for this. Therefore you should reduce your tax burden sufficiently. If you still pay the same amount of tax, you are not being able to save money. Therefore you should make an effort to generate a tax benefit. Following points must be kept in mind by you-
- When you take a personal loan, it is not taxable as the amount received on the loan is not considered as an income.
- To be eligible for claiming a tax deduction on the interest paid on your loan, you must submit adequate proof to income tax authorities to support your claim
- If you want to claim tax benefit on a personal loan, you should keep a copy of all the important documents like sanction letters, expense vouchers, auditor’s reports.
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What is the relation between Personal Loans and Taxes?
Since the personal loan does not form part of income, it is not required to be disclosed for income tax purposes.
How are Taxes impacted by loans?
The taxable benefit arises when they are used for specific purposes, and you are repaying it from your income.
Are Car Loans Exempted From Income Tax?
The funds borrowed as a car loan are not taxable.
Table of Contents
- 1 Tax Benefit available on Personal Loans
- 2 Different Purposes for which Personal Loan is utilized
- 3 Importance of Tax Benefit on Personal Loan
- 4 FAQ’s