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3 Cases Where You Can Get Tax Benefits on Personal Loan

While there’s zero tax benefit on personal loan, you can still get some deduction if you avail of this loan for purposes like the purchase or construction of your residential property, business investment and purchase of an asset, for which tax deductions are allowed. A personal loan is a type of loan option that provides you with funding for your personal financial requirements, may it be financing your wedding or vacation. Personal loans come at higher interest rates than other regular credit options and are generally short-term in nature. However, the personal loan eligibility criteria are way lesser and hence and is way simpler to apply for. What many may not be aware of is there’s an additional benefit under the personal loan. Indian Government may provide a tax benefit for loan repayment for a specific purpose. Note that before you opt for a personal loan, ensure to use the online personal loan EMI calculator. Using an online personal loan EMI calculator will allow you to take an informed decision about the preferred loan EMI and repayment tenure as per your cash inflows and repayment capacity. 

Let’s read on to get an idea about tax benefits on a personal loan – 

Tax benefits on personal loans in India – 

There’s zero mention of any special tax deduction on personal loans as per the IT (income tax) act, but there are specific deductions for other regular loans like home loans, education loans, etc. However, this does not infer that you cannot get tax benefits as per a personal loan. As there’s zero mention of income tax deductions on personal loans in the IT Act, the purpose for which you availed the personal loan is taken into account to grant income tax deduction for a personal loan. In the case of a personal loan, you could get the tax benefits on a personal loan only if you took the proceeds for any reason for which the tax deduction is permitted. 

Tax deductions on a personal loan can be permitted in just 3 scenarios – 

Mentioned here are 3 scenarios wherein personal loan quality for a tax deduction – 

Investment in business

If personal loan proceeds have been invested in your business, the interest component paid may be claimed as an expense. This may lower your tax liability and lower your company’s net taxable profit that they have basically invested in. There are zero caps on the proceeds that can be claimed in such a scenario. 

Investment in the construction and purchase of residential property

You can get tax benefits on your personal loan if you have used the personal loan proceeds for the construction or purchase of any residential property. You can get the tax benefits for interest repayment for the same as per Section 24 of the IT Act. The maximum amount that may be deducted as an income tax deduction in such a case is Rs 2 lakh for the house occupied by you. There are zero caps on the maximum proceeds that can be claimed if your home has been rented to someone. It’s crucial that if you are the borrower, you must be the property’s owner to get tax benefits. 

Investment in assets

The third and last scenario where you can get an income tax deduction on a personal loan is where the loan proceeds are invested in buying an asset like nonresidential property or jewellery. You cannot claim the tax deduction in that very year when you bought, wherein the interest is paid. However, it may be included in your acquisition cost. You can claim your tax benefit in the year when you sell the asset. 

It is necessary to remember here that tax deduction will be applicable just on your interest proceed and not on the principal loan proceed. 

If you have used the proceeds of a personal loan for any other reason besides the above-mentioned, zero tax benefits may be granted. 

So, what have you learnt? Can you use a personal loan to claim a tax deduction?

While loans such as education loans and home loans are extremely popular for their tax exemptions and deductions, are these benefits even available on personal loans? As mentioned above, while personal loans as financial instruments do not come with any tax deduction benefits, usage of the proceeds of a personal loan for any specific purpose that allows tax deduction may make you eligible to claim tax deductions. 

With zero limitation on the end usage of loan proceeds, a personal loan is a smart way to manage a range of considerable expenditures. You can avail of a personal loan to buy the latest gadget, travel, renovate your home or use it for medical exigency or a child’s higher education. However, while many distinct kinds of loans like education loan and home loan come with tax benefits, is any exemptions available on personal loan even? Can a personal loan help you save tax? Let’s take a look – 

Tax savings with a personal loan

Tax deductions on the personal loan proceeds may be available on your personal loan as well. The end usage of a personal loan or you can use the loan proceeds determines whether your used proceeds on a personal loan qualify for a personal loan. Here are a few instances where you can simply claim the tax benefits on a personal loan – 

Here are specific instances where you can claim personal loan tax benefits – 

Home Improvement

As per Section 80 C, a personal loan availed for home improvement is eligible for a tax benefit of as high as Rs 1.50 lakh. Thus, if you are availing of a loan to improve or renovate your house, you can benefit from tax savings on a personal loan. 

Construction or purchase of a residential property

If you are availing a personal loan to avail or renovate the residential property, you can simply claim a deduction of as high as Rs 2 lakh as per Section 24. However, just you, if you are the property owner, are permitted to claim this specific benefit. 

Business investment

If you invest your personal loan proceeds in business, the interest portion of your loan may be considered as the business expenditure. This may assist you as an owner in lowering your net tradable profit and hence lowering your income tax liability.

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Opting for tax benefit on your personal loan

A personal loan tax deduction is available in just on few instances. For this, you may consult your bank lender or your tax professional to know if your end usage on a personal loan qualifies for a tax deduction. Ensure you have sufficient proof to show how you have utilized your personal loan proceeds so that you can avail the benefit of exemptions and deductions in an easy and legal way.

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