Do Personal Loans offer Tax Benefits?
Today we all know about personal loans. Its multipurpose and collateral free nature has made it the choice for 80% of the loan seekers.
Whenever we opt for a loan, one of the important things to consider is the tax benefit which you can get on that loan. There are several tax benefits associated with Home Loans & Business loans which we have already mentioned in your previous blog.
But personal loan tax benefits is the one which is very less discussed. The reason behind this is that most of us are not aware of the tax benefits on a personal loan and some have a mind-set that there is no tax debatable for a personal loan. But is that true?
Tax benefits on loans help to reduce the financial burden of repayment. Through the tax benefits on loans, one can save money on the income tax which they need to pay.
Let us understand the Tax Benefits on Personal Loan in detail.
Talking about Personal Loan & Taxes, the first question which comes in our mind is:
Are personal loans taxable?
And, the answer to this question is:
Personal loans are non-taxable loans, as the loan amount which you get through personal cannot be considered as a part of one’s income since they cannot be taxable while filing income tax returns.
Hence, you don’t need to pay any income tax on your personal loans. However, it’s non-taxable only when it is availed from an authorized body, such as a bank or NBFC and registered FinTech platforms.
This is important because if you take a loan from an unknown or unauthorized body the borrowed money will be considered as your income, and it will be taxable.
Tax Benefits on Personal Loans
Same as Home loans and Business Loans, Personal loans come with tax benefits. But here the tax benefits depends on the end use of the personal loan amount. According to the Indian Income Tax Act- tax deductions on personal loans are allowed for some specific purposes which are:
- When the personal loan is used for education.
- When used for the purchase or renovation of your house/property.
- When the personal loan funds are used for business.
- When used to purchase assets.
Let us understand this one by one in detail.
Personal loan for Home Construction / Renovation
- Under the Section24 of Indian Income Tax Act, the personal loan amount when used for the purchase, construction or renovation of a home is tax debatable.
- The tax deductible amount is up to 2 lakhs which is from the interest paid towards your personal loan.
- If the property is on rent, then, in this case, the whole amount paid towards the interest can be tax deductible.
Personal Loan for Business
- When a personal loan is used for business, tax exemptions can be availed on it.
- The interest paid for a personal loan comes under the business expense here.
- And when filing taxes, the interest paid for the loan is deducted from the gross income and tax is imposed on the remaining amount.
- This way in total it reduces your tax liability in total.
Personal loan for the Purchase of an Asset.
- Many of us use personal loans to purchase assets such as -gold, bonds, share, etc.
- In this case, no tax benefits can be availed in the year you purchase the asset.
- ONE can avail tax benefits on a personal loan in the year you sell the asset.
- Personal loan interest is calculated as the cost of acquisition of the asset.
- Hence, the interest paid towards the personal loan is reduced from the capital gains which is earned from the sale of the asset.
So, the tax calculated is from the remaining amount, reducing the tax liability on you.
Let us understand this with an example-
Suppose a person takes a personal loan of ₹8 lakhs for a tenure period of 5 years, and uses this amount for the renovation of his/her house.
The gross income the person is ₹ 10 lakhs.
The interest paid towards the personal loan is 2 lakhs.
In this case, the interest paid which is 2 lakh in a financial year will be reduced from is gross income-
₹1,000,000 – ₹200,000 = ₹800,000
Now, we will be reducing ₹50,000 as a standard deduction.
₹1, 50,000 he can save under section 80 C
₹800,000 – (₹150,000 + ₹ 5,000) = ₹600,000
So, now the borrower will be paying tax only for ₹600,000.
Personal loan, when used for the above-mentioned reasons, offers excellent tax benefits that go a long way resulting lowering your cost of your overall financing.
However, it’s good to know that personal loan offers tax benefits when you use the loan for these three purposes. But it’s important to know that the tax benefit can be availed only on the interest paid. Principal repayment amount doesn’t provide you any tax benefit.