25 Nov 2019 | 5 min read
However, there is no direct deduction on a personal loan under the Income Tax Act in India. But there are tax benefits on other loans such as home loan, education loan and business loan. Hence, if you take a personal loan for business expansion, purchase of assets and home construction or purchase, you can avail some tax benefits under the Income Tax Act.
Here is how you can qualify for tax benefits on a personal loan.
If you use a personal loan amount for any business purpose, such as for operation or to buy assets other than property, the interest paid on a personal loan would be added to cost acquisition. This can be claimed as an expense, which would reduce the capital gains. As a result, it will reduce your tax liability. There is no cap on the maximum amount that can be claimed.
If you get a personal loan for the purchase or construction of a residential property, you can claim tax benefits on interest paid for the repayment of the personal loan under Section 24 of the Income Tax Act, 1961. This section allows a tax exemption of Rs. 2 lakhs for self-occupied property. You can’t claim tax deductions if the annual deduction is higher than Rs. 200,000. However, if you have rented out the house to someone, you can claim the total interest paid on personal loans as an exemption from the taxable income.
You will need to submit all documents to prove the loan amount was used for home renovation, purchase or construction to be eligible for a tax deduction.
You can get tax deductions on a personal loan used for the purchase of assets including non-residential property, jewellery, certain stocks and a lot more. The interest paid would be added to the cost acquisition, and the deduction can’t be claimed in the same year. But when you sell the assets, you can claim the tax benefits.
Personal loans are not only a great option to overcome financial problems you experience in day to day life, but can also be used as tax-saving tools, through planned strategy. Personal loan borrowers must remember that tax deduction can be claimed only on interest paid not on the principal, and only if the loan is used for any of above-mentioned purposes.
A personal loan comes with a host of other benefits that make it a smart decision to apply for a personal loan during a cash crunch.
Almost all banks and NBFCs (Non-Banking Financial Companies) offer a personal loan. Interest rate, tenure and eligibility criteria may vary from lender to lender, and you should compare personal loan terms offered by them before applying for a personal loan.
Read More: Save Taxes on your Education Loan