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How to claim tax deductions on personal loans in India?

Personal loans can be a way to finance your needs, but did you know they can also help you save tax? Find out how.

How to claim tax deductions

Personal loans can provide helpful financing for significant expenses, but did you know they may also offer tax benefits? While personal loans themselves are not tax deductible, you may be able to deduct interest payments if you use the loan for specific purposes, like funding a business or improving your home.

This article explores personal loan tax exemptions in India. Learn about deducting interest payments for businesses, investments, residential property, and more. Let’s begin!

What is a personal loan?

Financial organisations offer personal loans, which are unsecured sources of credit, to borrowers depending on their income, occupation, duration of employment, and credit score. Any of your pressing financial demands may be quickly met with a personal loan, sometimes called a consumer loan.

Your salary, occupation, and the lender’s evaluation of your loan application determine the maximum amount you may borrow. The loan amount that a company owner or self-employed person may get depends on the earnings in their profit and loss account. 

In the case of salaried professionals, the amount will be determined by the lender, considering your salary and any other liabilities you may have.

Also read: Stress to success: Transforming financial anxiety into financial freedom

Are personal loans taxable?

In most cases, the amount you borrow from a personal loan is not included in your taxable income, so you won’t have to pay taxes on it. Your personal loans will not be subject to income tax in this case. 

A word of caution, though: if you’re looking for a loan, make sure it comes from a reputable organisation like a bank. Otherwise, any money you borrow may end up being included as income.

Can you get tax exemptions on personal loans in India?

In most cases, a person’s income is subject to taxation. A person’s monthly salary does not include a personal loan. Thus, it is not subject to taxes and cannot be used to claim any tax benefits. 

While this is true, it doesn’t mean that a personal loan can’t help with taxes in any way. There is a way through which you can get tax benefits on your personal loans. Let’s discuss this in the following section.

Also read: Managing Business Finances Effectively

How do you get a personal loan income tax exemption?

The Indian Income Tax Act does not provide any special exemptions for personal loans. On the other hand, there is a loophole that allows for tax benefits on mortgages and student loans. 

To get tax benefits on your personal loan, your eligibility to receive the exemption depends on your ability to prove that the funds were used for specific purposes. 

Individuals might use those to their advantage when filing their taxes for a personal loan. Let’s talk about these in more depth now.

For business purposes:

Tax deductions are available for the interest paid by borrowers who use their loan funds to start or grow their businesses. The borrower may reduce their taxable income by the amount of interest if it is considered an expense. 

Anyone may take advantage of this tax break if they employ a personal loan for business purposes, since the borrower was able to lower their taxable income thanks to the loan.

You may claim business loan repayment costs as a tax deduction as they are considered a separate expense from income or profit under the Income Tax Act of 1961. Borrowed funds used to purchase machinery, tools, and construction supplies for a business may be written off as a tax deduction. 

Investing in assets:

If you take out a personal loan and invest the money in things like gold, securities, equities, non-residential properties, etc., you may claim the interest as a tax deduction. The interest paid on a personal loan may be deducted from the borrower’s taxable income if they use the money to purchase an asset. 

Including this in the purchase cost lowers the capital gains when the asset is sold, which means there is no tax due on that sale.

Residential construction/purchase:

For borrowers who use their personal loans to build or buy a home, the interest paid on such loans may be deducted under Section 24(b) of the Income Tax Act, 1961. For properties that are either used for self-occupation or are considered to be let out, the borrower is eligible to claim a maximum tax deduction of 2,00,000 rupees.

Under certain circumstances, all of the interest paid on the mortgage might be deducted from taxable income if the property is leased out.

Residential property improvement:

Under Section 80C, paid people can get a tax break on their personal loans if they use the money for home improvements instead of building or buying a home.

Within one year of the property’s sale, the borrower must pay all requested exemptions. There is a cap of ₹1,50,000 on tax exemptions under Section 80C.

Also read: Mastering the maze: Your pathway out of student loan debt 

Personal loan tax exemption for salaried

If paid workers can get a personal loan without paying taxes on it, the answer depends on what the user plans to do with the money from the loan.

Under Section 80C of the Income Tax Act of 1961, people who take out personal loans in India may claim a tax refund. Under this provision, people may deduct up to INR 1.5 lakh in certain costs per fiscal year, including the principal and interest on certain loans. 

If you have a personal loan, you may reduce your taxable income and save on taxes by deducting the amount you pay back each year.

Conclusion

In summary, while personal loans themselves don’t qualify for tax exemptions in India, strategic use of the loan funds can get you certain tax benefits. Carefully track how you use personal loan money for purposes like funding businesses, investing in assets, residential construction, or home improvements. 

With proper planning, personal loans can be beneficial while also minimising your annual tax bill.

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StockGro Team

StockGro is India’s first and largest ‘Social Investment’ platform aimed at helping you master the art of “Trading & Investment”. Trade, Invest and get rewarded to Learn everything about ‘Investments’ the fun-filled way.

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