Though there are no deductions for personal loans tax benefits can still be availed if the loan is taken for reasons like business investment, purchase/construction of residential property, and purchase of assets for which deductions are permitted.
A personal loan is a kind of loan option that offer finance for one’s personal financial needs, be it funding for a vacation or a wedding. Personal loans come at a higher rate of interest when compared to other regular loans and are usually short term loans. But the eligibility criteria for a personal loan is much lesser and hence, is much easier to apply for. What many might not be aware of is that there is an added advantage to personal loans as one can get tax benefits under a personal loan. The Indian Government grants tax benefits for repayment of loans. Let’s study more about the tax benefits available under personal loan.
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Tax benefits for personal loans in India
There is no mention of any special deductions for personal loans under the Indian Income Tax Act, but there are tax deductions for other regular loans such as education loan, home loan, etc. But this does not mean that one cannot avail tax benefits under the personal loan. Since there is no particular mention of tax deductions for personal loan in the Indian Income Tax Act, the reason for which the personal loan was availed will be taken into consideration in order to grant tax deductions for a personal loan. In case of a personal loan, one can avail tax benefits only if the personal loan was taken for a reason for which income tax deduction is allowed.
Tax deduction for personal loan will be allowed in only three cases.
Listed below are the three cases under which a personal loan will qualify for tax benefits:
1. Invest in Business
If the personal loan amount has been invested in business, the interest paid can be claimed as an expense.This will bring down the tax liability of the borrower and reduce the net taxable profits of the business that they have invested in. There is no cap on the amount that can be claimed in this case.
2. Investment for the Purchase/Construction of a Residential Property
One can avail tax benefits from their personal loan if they have used the personal loan money for the purchase or construction of a residential property.The borrower can avail tax benefits for repayment of interest for the same under Section 24 of the Income Tax Act, 1961. The maximum amount that can be deducted as tax deductions in this case is Rs.2,00,000 for a house occupied by the borrower. There is no cap on the maximum amount that can be claimed if the house has been rented out to someone else. It is important that the borrower be the owner of the property in order to avail tax benefits.
3. Investment in Assets
The third and the last case where one can avail tax deductions under personal loan is in cases where the loan amount has been invested for the purchase of assets such as jewellery, non-residential property, shares, certain stocks and more.The borrower cannot claim the deduction in the same year in which the interest is paid but it would be added to the cost of acquisition.The borrower can claim the tax benefit in the year in which they sell the asset.
It is important to note that the tax deduction will be applicable only on the interest amount and not the principal loan amount. If the personal loan has been applied for any reason other than the above mentioned reasons, no tax benefits will be granted on the personal loan.