The pandemic has changed everything drastically, from being indoors and attending office and school online to online shopping all this has become new normal. The Covid-19 pandemic has brought countries to a complete stand-still, where most of them are going through a tough economic condition. The global economy has been pushed into one of the worst recessions of recent times. Indian businesses are no less and have also suffered the consequences of poor consumer demand, supply fluctuations, and now have to further walk on the tightrope of restoring their production to the supply chain. Because of all these prevailing conditions businesses are now looking for funding options so that they can come back on track. And business loans being one of the major business funding options in India, many business owners and entrepreneurs are going for it. Seeing the hike in the demand there are certain important things which a business loan borrower should know- this includes knowing about the tax benefits on the business loan. Availing tax exemptions on a business loan can surely reduce your tax burden, so let’s know it in detail.
Interest paid on Business Loan is Tax-Deductible
The business loan interest rate varies from lender to lender, where it is categorized as an expense due to loan funding being utilized in fulfilling business purposes. Hence the interest component paid in the repayment on loan is claimed as a tax-deductible expense. When calculating the income tax for your business the interest paid is deducted from the gross income. Make sure you maintain correct records of your business loan so that you can submit proof if asked by the income tax department.
Principal on Business Loan is NOT Tax-Deductible
In a business loan, the principal amount is not tax-deductible. Hence, you are not allowed to deduct this amount from your gross business income while calculating taxes. The fact of the matter is the principal amount is not earned by your business. The money is borrowed from a third-party and needs to be repaid. Hence, it cannot be considered as the income for your business. This means the business loan amount cannot be included in your gross income. And neither need you to pay income tax for this amount nor can you deduct it from your gross income.
Tax Benefits on Business Loan
- The business loan interest amount is tax exempted.
- The principal loan amount of a business loan is not tax-deductible.
- While filing income tax interest paid on a business loan needs to be deducted from the gross income.
- Tax liability is calculated by subtracting the business expenses from the gross business income.
- To avail of the tax deduction, you need to fulfil some basic criteria.
Remember a business loan by any of the banks or lenders is a type of funding and hence cannot be counted in your income. Hence it is not tax-deductible. Business loans do not fundamentally alter what one owes in taxes. According to the Income Tax Act 1961, getting money through loaning isn’t the same as earning money for the business. Hence, the interest levied on a business loan is considered to be tax-deductible, whereas the principal amount is not tax-deductible. But, then there are some rules to be followed.