The primary purpose of personal loans is to help individuals with funds during times of financial distress – either planned or unexpected. Typically, a personal loan is not taxable since personal loans are not included as a part of your income when you are filing income tax returns. However, you must apply personal loan from a good source such as a bank or financial institution because any loan from unknown sources may be considered income in your income tax computation.
You can claim tax benefits attached to personal loans, but some conditions are attached to them. Many people miss out on personal loan benefits and tax rebates as they are unaware of them. The tax benefit you receive from a personal loan will depend upon the end use of the loan amount.
What are Personal Loans?
A personal loan is a funding option offered by financial institutions to cater to an individual’s personal financial needs. Personal loans are a convenient way of availing of finance for several purposes. These loans are flexible, and you can determine their final use.
Whether you need to purchase a property, plan a wedding, fund your higher education, or tackle an emergency, you can apply for a personal loan, as it can act as a safety net and come to your rescue. Personal loans are unsecured loans. This means you don’t need to pledge any collateral to avail of them. Although the interest rate of personal loans is higher than secured loans, they are more easily accessible to self-employed and salaried individuals than other types of loans.
Under what conditions can you claim tax benefits for personal loans?
You can claim tax benefits if you utilize your loan amount to acquire, construct, or repair a house or property. You can claim a tax deduction for the loan if you prove that you have used the loan for a reasonable expense. You will need to maintain documents such as labor charges and bills demonstrating that the loan has been used for home buying or repairing purposes.
According to the current income tax laws, the government allows tax deductions on any type of loan available to buy or renovate a residential property. So, applying for a personal loan to that end is considered an expense for claiming a tax deduction. You can also use the personal loan towards a down payment for the property loan and claim a tax deduction. But you must note that the entire loan amount is not eligible for a tax rebate but only the interest paid.
3 Income Tax Benefits on Personal Loans
You can claim income tax benefits on personal loans taken for the following purposes:
Business Investment
You utilize the tax benefits on a personal loan if you invest the amount in a business and claim the interest as expenses. By doing this, you can reduce your tax liability and net taxable profits of the company. However, this deduction is applicable only for secured personal loans.
Purchase, construction, or renovation of residential property
If you have bought/built a house or renovated current property through personal finance, you can avail of certain tax deductions. You can use the tax benefits on the personal loan interest rate repayment under section 24(B) of the income tax act. The maximum amount deductible for a self-occupied house is Rs 2 lakhs. There’s no upper limit on the amount claimed if you rent out your property.
Investment in Assets
The third situation in which you can avail of a tax deduction for a personal loan is when you invest the amount in assets such as
- Jewelry
- Non-residential property
- Shares
- Certain stocks
However, you cannot claim the deduction in the same year you pay the interest rate. Instead, the interest amount will be included in the cost of acquiring your asset. When you decide to sell the asset in the future, you can claim the tax deduction from your capital gains equal to the interest amount. This tax deduction will only be applied to the interest amount, not the principal amount.
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Key Takeaway
You can avail of several personal loan benefits and the tax benefits it offers. But you must use the loan only for the above purposes to avail of the tax benefit. So, if you are eligible for a tax deduction, take advantage of the benefit and avoid your hard-earned money from getting taxed.
