Tax Exemptions on Personal Loan Interest

Last Updated: 14 Oct 2024

Interest paid on personal loans is usually not tax deductible. But if the amount raised through a personal loan is used for certain specific purposes such as for the purchase of a residential house; or for home renovation; or is invested in one’s business; or is used for the purpose of education, then the interest paid on the loan may be tax deductible to some extent. Tax deductible means you can deduct the interest that you pay while calculating your taxable income. Your taxable income and the tax that you pay is lowered because of this.

Sapna aapka. Personal Loan Humara

Apply Now

Personal Loan Tax Benefits To Know About

No, a personal loan does not come with any special tax benefits. But there is a solution. Every personal loan borrower can take advantage of a few circumstances to turn things in their favor.

However, whether you’ll receive tax exemptions on personal loan depends on your intended purpose for using the loan’s value. If you can show and prove the money was utilized for that precise purpose, you become eligible to receive and enjoy the following benefits:

Purpose	Implication	Loan Exemption
Home Renovation or Improvement	Tax deductible under Section 80C	A maximum of INR 1.5 lakh
Business Investment	Lowers net taxable profits	No limit
Property Construction or Purchase	Tax deductible under Section 24	A maximum of INR 2 lakh
Asset Purchase	Lowers capital gains applicable on the asset sale	No limit

Home Renovation or Improvement

Have you read the Income Tax (IT) Act Section 80C? If not, know that, as per this section, a personal loan obtained for the purpose of house renovation qualifies for a tax deduction. However, the maximum tax deduction is only INR 1.5 lakhs.

So, you get entitled to tax savings on personal loans when the purpose of the loan is home restoration or renovation.

Home Construction or Purchase

The interest amount paid on personal loans taken out for acquiring or building a home may be deducted from your taxable income.

You may deduct up to INR 2,00,000 in interest if the home is used for personal use. The whole interest payment is deductible from your taxes if you rent it out.

Business Investment

One can write off a personal loan’s interest component as a business expenditure if the personal loan amount is invested in one’s business.

• Education Expenses

  As per IT Act Section 80E, any personal loan borrower is eligible for tax deductions if the loan amount is used for the purpose of getting education.

  Irrespective of the fact whether the loan is used for the education of their children, their spouse, or themselves, it will be tax deductible.

• Asset Acquisition

  Let’s say you use the funds from the personal loan to purchase:

  • Jewelry
  • Shares or stocks
  • Non-residential property, etc.

  In that case, your asset acquisition cost will increase via the interest payable for the loan. Your tax obligation will be smaller when you sell this item since the purchase cost is subtracted from the selling price for calculating taxable capital gains.

Sapna aapka. Personal Loan Humara

Apply Now

Conclusion

One can get tax exemptions on interest paid on personal loans under certain circumstances. It is the purpose of your personal loan that determines whether you’ll qualify for tax savings. So, learn what these circumstances are and maximize the deductions.

Frequently Asked Questions

When is the interest paid on a personal loan tax deductible?

If the amount raised through a personal loan is used for purchase of a residential house; or for house renovation; or is used in business; or is used for the purpose of education; then the interest paid can be tax deductible.

Can I use my ITR as proof of income for a personal loan?

The document requirements for a personal loan differ from lender to lender. While some grant personal loans without ITR as income proof, others won’t.