Tax Benefits Associated with A Personal Loan

Last Updated: 14 Oct 2024

Interest paid on some types of loans can be deducted while calculating your income tax liability. If you can show that the amount raised through your personal loan has been used for any of the purposes for which tax deduction for interest paid is available, then you can get tax deduction for the interest that you pay on your personal loan.

Sapna aapka. Personal Loan Humara

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Tax Benefits for Personal Loans in India

While the Indian Income Tax Act does not specifically mention any special deductions for personal loans, it does provide tax deductions for other types of loans, such as education and home loans. However, this does not mean that individuals cannot avail tax benefits for personal loans. In the absence of specific provisions for personal loans in the Income Tax Act, the purpose for which the personal loan was obtained is taken into consideration to determine eligibility for tax deductions.

To qualify for tax deductions on a personal loan, the loan must have been taken for a purpose for which income tax deductions are allowed. There are three specific cases where tax deductions for personal loans may be permitted.

• Invest in Business

  When a personal loan amount is invested in a business, the interest paid can be claimed as an expense. This personal loan tax benefit can help lower the borrower’s tax liability and reduce the net taxable profits of the business in which the loan was invested. Importantly, there is no specific limit or cap on the amount that can be claimed in this case.

• Investment for the Purchase/Construction of a Residential Property

  If the funds from a personal loan have been utilized for purchasing or constructing a residential property, individuals can potentially avail themselves of tax benefits. Under Section 24 of the Income Tax Act of 1961, borrowers can claim tax deductions to repay interest on such loans. The maximum allowable deduction in this scenario is Rs. 2,00,000 for a property the borrower occupies. However, if the property is rented out to someone else, there is no specific cap on the maximum amount that can be claimed. It is important to note that to avail tax benefits; the borrower must be the residential property owner.

• Investment in Assets

  The third and final case where personal loan tax benefit can be availed under a personal loan is when the loan amount is invested in purchasing assets like specific stocks, non-residential property, jewellery, shares, and more. In this scenario, a borrower cannot claim this deduction within the same year after paying the interest. Instead, the interest amount is added to the cost of asset acquisition. The borrower can then claim the tax benefit in the year they sell the asset.

  It is important to emphasize that the tax deduction applies only to the interest paid on the personal loan, not the principal loan amount. If the personal loan is taken for any purpose other than the aforementioned cases, no tax benefits will be granted on the personal loan.

Sapna aapka. Personal Loan Humara

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Conclusion

Tax exemption for personal loans is limited to specific instances. To determine if the end-use of your personal loan qualifies for tax benefits, it is advisable to consult your lender or seek advice from a tax professional. Maintaining sufficient evidence to demonstrate how you have utilized the funds from your personal loan is crucial. This will enable you to avail deductions and exemptions lawfully and straightforwardly.