If you are thinking of availing a small business loan, but hesitating to go for it because you are not sure how it will affect your next year’s taxes. 

Well, the answer is – business loans are 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. 

Benefits of Availing Business Loan?

Funding acts as fuel for the business which helps them to be alive and functional. Business loans are those financial tools that are intended to fulfil the funding needs of a business. From meeting working capital requirements to inventory purchase and from paying the staff to paying rent for the workspace or factory space a business loan has the potential to help you with all these. Hence, it will not be wrong if we say that a business loan plays a vital role in business-specific growth. Taking up a business loan India offers several benefits to the borrowers which are:  

  • You can use a business loan to serve several business purposes.
  • Business loans are widely available and come with flexible repayment options which makes the loan reimbursement a bit more convenient for the borrowers.  
  • To support SMEs government have launched several loan schemes that have much flexible terms and conditions and off course pocket-friendly interest rate.
  • The interest paid on business loans is tax-deductible due to it being termed as a business expense. This reduction in interest payments lightens up the borrower’s tax burden.

Tax Benefits That Can be availed under Business Loan? 

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. 

But 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 you need to pay income tax for this amount, nor can you deduct it from your gross income.

Availing a business loan in today’s world has become fairly easy, this has been possible with the involvement of advanced technology in the banking sector. The loan is available widely and can help your business to grow and reach new heights. However, the important thing which can’t be ignored between all these benefits is that it’s a loan and hence it has to be repaid over some time.