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In case a customer is looking for additional funds but has no security or property to pledge as collateral, a personal loan is the ideal option as it is an unsecured loan. Usually, personal loans have no taxes. But since the customer is not pledging any asset, the rates of interest applicable to these loans may be relatively higher than the rate of interest charged for secured loans. However, the application and approval process for personal loans is fairly simple if the customer is a salaried professional. Personal loans can also be availed by self-employed individuals if the proof of income from their enterprise can be provided to the bank.
Personal loans in general are not viewed as part of a customer’s income. When filing income tax returns, the loan won’t be viewed as a taxable fund, meaning that a customer will pay no taxes on the personal loan. But in such cases, the loan taken out by the customer must be from a valid source such as registered financial institutions. Loans from unrecognised sources are usually viewed as income at the time of computing taxes. In fact, tax benefits can be claimed on personal loans in certain cases. Whether or not the loan is secured from a registered financial institution, if the customer can prove that the funds acquired through the loan were utilised for a valid expense, they can even use the loan for tax deductions and tax saving.
If a personal loan is utilised for the purpose of renovating or purchasing a residential property, the customer can avail great benefits when it comes to tax deductions. The Income Tax Act (Section 24(b)) offers relief to customers who purchase homes, providing them with tax deductions in such cases. Should the Personal Loan be used for the purpose of making down payment before buying a house, they can also claim tax exemption. And should the funds be utilised for home reconstruction, renovation or repairs, the customer can claim for tax deduction.
Deduction cannot be claimed on the loan’s principal amount. However, the interest paid by the customer can be used for tax deduction. In case the customer uses the funds to spend on the house in which he/she resides, tax deduction can be claimed on the interest amount provided it does not exceed Rs. 1,50,000. In case the customer has rented the house, the amount of money that can be claimed on the interest amount has no particular limit.
In case the customer has bought a house under construction, the deduction cannot be claimed until the completion of the construction. Moreover, the house must be ready for occupancy not more than three years from the date the customer has taken the loan. All the documents that show that the loan amount has been used for purposes related to the house must be preserved and furnished at the time of claiming tax deductions.