Tax Benefits on Personal Loans


25 Nov 2019 | 5 min read

An instant personal loan is a key financial instrument that provides you with funds in emergencies. Be it your higher education, dream wedding, dream home, exotic vacation, or medical emergency, personal loans can be a complete solution to these problems. Due to easier eligibility criteria, a personal loan is a more easily accessible source of funds for salaried and self-employed individuals. And what is more, many borrowers might not know, but they can get tax deductions on a personal loan. This piece of the article presents an overview of the tax benefits arising from a personal loan. 

Tax deduction on a personal loan in India

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. 

Personal loan for business investment

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. 

Personal loan for the purchase or construction of a residential property

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. 

Personal loan for investment in assets

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.  

Why should you get a personal loan?

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. 

  • Multipurpose loan: Unlike other secured loans, home loan and car loan, a personal loan is not restricted to any specific reason or situation. You can use it for whatever purpose you want like higher education, transportation, big-ticket purchase, rent, and so on. 
  • Reasonable interest rate: Now, with too many players in the market, the interest rate applicable on a personal loan is reasonable, starting from as low as 10.75% p.a. If you fulfil all eligibility criteria and have all documents required for a personal loan, you can get a personal loan at the lowest interest rate
  • Easy to avail: A personal loan needs minimum documentation. With the penetration of technology in finance, accessing a personal loan has become significantly easy. Personal loans can be availed from the comfort of your home by providing a few basic details about you and submitting some documents online. 
  • Flexible loan tenure: Personal loans are available for flexible repayment tenure ranging from 6 months to 6 years. Some lenders even allow personal loan prepayment or foreclosure without any charges.  
  • Instant disbursal: After document verification, the loan amount is credited into your bank account within a few hours. 

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. 

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