Tax benefits of personal loan you probably didn’t know


Instant personal loans are great financial tools that can provide funds without delay; therefore many people are looking to avail a personal loan in Bangalore as they are easily accessible compared to other loans. A personal loan is a loan taken for personal purposes, such as funding a wedding, or a vacation, or basically pretty much anything you need. Personal loans are unsecured loans, meaning that the borrower does not need to provide any security or collateral to avail the loan. Consequently, interest rates are a bit higher. The loan is given depending on the borrower’s creditworthiness, based on his credit record.

However, many of us don’t know that personal loans are also eligible for tax benefits, which is an added advantage besides the easy accessibility. Note that in general, personal loans from a valid source are not taxable. The loan amount is not considered as income while calculating income tax returns; therefore, you do not have to pay any income tax on personal loans. Besides this, personal loans also come with tax benefits, depending on how the loan has been used. You can follow the link to know more about availing personal loans.

The Indian Income Tax Act does not contain any specific sections discussing tax benefits on a personal loan. However, the purpose of the personal loan (how the loan has been spent) is considered for tax benefits. The interest you pay for the personal loan will be exempt from taxation if you use the loan amount for the following purposes:

Purchasing or constructing a residential property

According to section 24 of the Income Tax Act, if the borrower uses the loan amount for purchasing or constructing a piece of property, the interest paid for that loan can be claimed for tax exemption. If you have taken a personal loan in Bangalore and used the loan amount to buy your house, you can claim tax benefits under section 24(b). For a self-occupied house, one can claim tax benefits of up to Rs. 2 lakhs on interest paid on the loan. For a rented house, one can claim tax benefits on the full interest paid on the loan. However, make sure that you preserve all relevant documentation as proof that you have used the loan for your home.

Home improvement

According to section 80C of the Income Tax Act, the principal amount of the personal loan (taken for home renovation or home improvement) is eligible for deduction. If you utilize your personal loan for home renovation, you can claim tax deduction benefits up to Rs. 30,000. You must show proof that you have used the personal loan amount for home improvement.

Business purposes

If you use the personal loan to use it as a business investment, then the interest to be paid for the loan will be eligible for a tax deduction. These tax deductions will be adjusted with your firm’s profits and revenue. The interest applicable to your personal loan may be deducted from your firm’s net profit, and you will be required to pay taxes on the remaining profit. This leads to a reduction in taxable profits and lowering of overall tax liabilities. In this case, there is no limit on the number of tax exemptions.

Purchasing an asset

If you take a personal loan in Bangalore or any other city to purchase an asset (shares, non-residential property, jewellery, etc) then the interest paid on the loan amount over time will be added to the cost of acquisition of the asset (total cost of acquiring the asset). Thereby, when you sell the asset, the capital gains on the asset will be reduced. 

As you can see, if you are thinking about availing a personal loan, carefully consider the usage of your loan if you want to be eligible for tax exemptions as per the Indian Income Tax Act.