Do You Know the Top 4 Tax Benefits of Personal Loans?
- Radhika Menon, Content Strategist at KreditBee
- 13.10.2022 10:30 am #tax
There are some things we all know about personal loans. They are collateral-free, multipurpose, and easy to avail of now. Just like home loans and business loans, personal loans to make it possible for you to get some tax relief during the repayment period. But most people are unaware of a slew of tax benefits on personal loans in India.
Are Personal Loans Taxable?
Personal loans are non-taxable loans, and the loan amount which you receive under a personal loan cannot be considered a part of your income. However, under the Income Tax Act, there are some circumstances under which there are significant tax benefits on personal loan interest for salaried employees and businesspeople. For this, the source of the loan and the purpose of the loan are taken into consideration.
Tax Benefits of Personal Loans:
Personal Loans for Home Construction & Renovation – Under Section 24 of the Indian Income Tax Act, if you avail of a personal loan for home improvement, purchase, or renovation, the interest amount is tax deductible. If you own the property and live in the house, you are eligible for up to ₹ 2 lakh from the interest paid towards your loan. The total interest paid on the loan can be deducted from your taxable income if it is a rented house.
Personal Loan for Self-Employed – If you run your own business, you fall under self-employed individuals. Personal loans for self-employed professionals are also eligible for tax exemptions. The interest paid on the personal loan for business is deducted from your business's gross income, and taxes are imposed on the remaining amount. This way, the interest paid on your loan reduces your total tax liability.
Personal Loan for the Purchase of an Asset – A personal loan for the purchase of an asset such as gold, bonds, shares, etc., can also offer some tax benefits on personal loan interest. However, in the year of the purchase, you cannot avail yourself of any tax benefits. In the year of selling the asset, you can add the interest amount to the acquisition cost and get tax benefits on this purchase. The interest paid on the personal loan is reduced from capital gains earned from the asset's sale, and the tax is calculated on the remaining amount. Thereby reducing your tax liability.
Personal Loan Tax Exemptions – Under some circumstances, there are personal loan tax exemptions for salaried people and people in business. The effect of personal loans on your tax liability is lesser than that of taking a home loan or student loan. But, keeping yourself aware can help you get substantial tax benefits even through a personal loan. Here's a look at the summary of personal loan tax exemptions –
End Use of Loan Amount | Tax treatment of Interest Expense | Implications for the Borrower | Exemption Limit |
For Business | The interest expense is deducted from the business profits before calculating the tax | Tax liability gets reduced as per applicable marginal tax rates | No limit |
For the Construction / Renovation of a Residential Property | Allowed as a deduction from the Annual Net Value of the residential property. | Tax liability is reduced as per the applicable marginal tax rate | Up to ₹2,00,000 |
For the Purchase of Any Other Asset | Not allowed in the year of the purchase. Interest expenses are added to the acquisition cost when selling the asset. Thus, reducing capital gains. | Tax liability is reduced in the year of asset sale as per the applicable rate of capital gains tax. (Short term or long term) | No Limit |
Personal loans are a great way to procure funds when you need them the most. Some people avail of personal loans to consolidate their debt, and others take personal loans to finance a wedding, an overseas vacation, or a big purchase. Even though the interest rates on personal loans are high, they can help you repay debts or renovate your house during a difficult time.
Even though the tax benefits from personal loans are smaller than those available with home loan for customers or student loans, a little bit of awareness can go a long way. The interest paid on the personal loan can reduce your taxable income or be included in your tax-deductible expenses under the three circumstances described above.
