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HomeLaw & OrderHow can you avail of tax benefits on a personal loan?

How can you avail of tax benefits on a personal loan?

Instant personal loans are very common to avail these days. With digital personal loan platforms, this trend is gaining great momentum day by day. A personal loan is an unsecured loan that can be taken up easily. It is the reason why; a huge number of applicants find themselves opting for it to procure finance for their personal requirements. Such requirements might include vacation, wedding, education expenditures or other crucial personal projects.

A personal loan is an instant way to accumulate funds. However, it is necessary to figure out a lender with a suitable rate of interest. In this context, tax benefit on personal loan is the much-required benefit for loan borrowers. However, the most vital question is – Is a personal loan taxable?

Does India’s ITA (income tax act) permit tax deduction on a personal loan?

When we discuss personal loan deduction, there are basically 2 loan aspects. Every aspect is met distinctly by India’s income tax act in relation to tax benefits. Such aspects are:

∙       Interest component charged on a loan

∙       Principal component of a loan

If you are to answer questions regarding the possibility of a tax rebate on a personal loan, the simple answer will be ‘No’. The income tax act has rules for exemptions and tax deductions on both interest and principal on specific loans. These involve education loans, home loans, business loans etc. However, the act does not endow any deduction on income tax returns on a personal loan.

End-use of loan proceeds will determine whether tax must be levied on a personal loan or not. It is owing to the lack of direct mention of tax relaxation on personal loan rates and principal in the IT Act.

Next, the paramount factor is your loan source, i.e., traditional source or instant personal loan application. The personal loan principal is nontaxable or taxable based on the source from which you avail the loan. Suppose if you avail the personal loan from NBFCs, banks or any other legally approved institution, then the loan’s principal proceeds are considered a liability, and it is nontaxable.

The rule is the same if you avail of the personal loan online through an instant loan application. However, if the loan amount is borrowed from a relative, friend or any nonprofessional source, it is considered your income. The income is included in your gross income when calculating your income tax.

However, what about the interest paid on the personal loan? Can loan seekers enjoy any tax deduction on the personal loan interest component? As discussed previously, there are specific conditions and the final use of loan proceeds is considered for tax relaxation.

Listed here are 3 circumstances as per which individuals can get tax benefits on personal loan:

Personal loans utilized for business purposes

If an applicant ends up investing a personal loan in his business, the interest component on loan becomes the liability for the business. Here, interest paid is thought to be an expenditure and can be reduced from net business profit. It brings down the overall taxable net profit amount. Moreover, the IT Act has set up a limit on tax-deductible amounts for businesses. It means the whole interest on individuals is tax-deductible if utilized in business.

Personal loans utilized for purchasing or residential property construction

Section 24 of the IT Act, titled ‘tax deduction from house property, makes it possible to make most of the tax benefits. As per Section 24, interest paid for the funds acquired via personal loan can be deducted from taxable income from residential property. Section 24 is applicable if money is utilized for buying, renovating, or constructing the same property.

As Section 24 does not mention the loan type, personal loan too is eligible for the tax deduction. Applicants will require presenting the necessary documents to prove the use of personal loan proceeds. Up to Rs 2 lakh can easily be claimed as a deduction on the personal loan interest component if the borrower occupies the home.

For buying assets

Suppose the borrowed money is utilized for acquiring shares, jewellery, or non-residential assets. In such cases, the borrower cannot claim instant tax relaxation when buying the said assets. However, the interest component paid on the loaned proceeds utilized for purchasing the asset is included in your overall expense of acquiring the asset. Thus, if the borrower sells a specific asset, the paid interest component even is deducted from capital gains. This is cut as a part of the acquisition expense. It will effectively lower the taxable profit.

Deduction areaSectionMaximum deductible amountConditions
Principal component80 CRs 1.50 lakhHome property must not be sold within five years of possession.
Interest component24 BRs 2 lakhLoan proceeds must be availed for the construction/purchase of a home. Construction must be done five years from the end of the financial year.
Interest component80 EERs 50,000The loan amount availed must be Rs 35 lakh or less, and the value of the property will not exceed Rs 50 lakh. 
Stamp duty80 CRs 1.50 lakhIt can be claimed just in the year such expenses are incurred.
Interest component80 YEARRs 1.50 lakhThe property’s stamp value must be Rs 45 lakh or less. The taxpayer is ineligible to claim a tax deduction as per Section 😯 EEA.

Ending note

Instant personal loan applications such as Early Salary, MoneyTap, etc., have provided swift access to fast personal loans. The Income-tax Act of India doesn’t explicitly offer any tax linked guidelines on a personal loan. Such vagueness permits other ways to ascertain the tax benefits of personal loan. Such tax benefits on a loan can just be availed if the applicant meets specific personal loan eligibility criteria. It can be proved by providing the essential documents. Thus, it is important to keep safe all the vital documents, certificates, and bills relevant to the loan or use of loaned finances. Note that in the case of personal loan balance transfer too, the same rules apply as in the case of personal loan. This is because the personal loan balance transfer option is a variant of a personal loan.