Personal Loan Tax Benefits

A personal loan is a type of loan that you can take to get the needed help to get out of the financial crisis. It offers competitive interest rates and is one of the most hassle-free types of loan. It is essential to have all the important information before you even consider applying for a personal loan.This will surely help improve your chance of getting fast personal loan approval. Not just that, you can also secure a low-interest rate on your personal loan application with the help of that. Assessing all costs, comparing all personal loan providers' and lenders' interest rates, maintaining a good CIBIL score, considering your needs, as well as choosing the right amount are a few things you can do for a seamless and stress-free process.All that is needed from you is to keep a few things in mind before you finally apply for a personal loan. Things like processing fees, credit score, low-interest rates and other fees and charges are things you need to keep your eyes open for. This will make you understand what financial institution, bank, NBFC, their terms and conditions, as well as the type of loan works best for you and your requirement. Also, with the help of this, you can prevent choosing a lender who is wrong for your requirements, borrowing more money than you need, as well as choosing an inconvenient tenure.Personal loans are usually unsecured, which implies that they not backed by collateral. While this makes the loan slightly more expensive due to a higher rate of interest, none of your assets is under scrutiny for loss, in case of defaulting on your instalments.Since the lender does not take any collateral against the loan, they scrutinize all your financial details to validate if you shall be able to pay back the loan amount.Here are a few points that should be kept in mind to ensure that your personal loan without collateral is sanctioned.Everyone knows the benefits of opting for a personal loan. It is readily available. Can be used to fund anything from higher education, to tackle an emergency medical situation, and even your dream wedding. So on and so forth.But what most people don’t really know is that they not only have meet your financial needs but are also capable of giving you great tax benefits.Let’s read on and find out more about the tax benefits of Personal Loans.

A personal loan is something you look for when it comes to getting out of a financial crisis. You can easily avail of a personal loan whenever you want as long as you maintain a good CIBIL score, a good relationship with the lender, and you don't have a lot of debt on your shoulder.To get the approval of the lender for your personal loan application, you have to keep in mind whether you follow the required steps and whether or not you are eligible for the same. If you are wondering whether personal loans are taxable or not in India, the simple answer is no.Personal loans are not taxable because the loan amount is not considered to be a part of your income while filing income tax returns.Meaning, you won’t need to pay any income tax on personal loans. However, a personal loan has to be availed from a valid source, like a bank or another financial institution, as loans from unknown sources can be considered as part of your income.

Under the Indian Income Tax Act, tax exemptions are given on personal loans. But, in order to get tax benefits on a personal loan, the purpose for which the loan has been used is considered.
Tax benefits on personal loans are applicable only if the personal loan was used for the below purposes:

Personal Loan used for purchasing/constructing a residential house:

According to the Income Tax Act, under section 24(b), if the personal loan is used to purchase or construct a house, you are eligible for a tax deduction against the interest portion of your loan repayment.

• In case of a self-occupied house, you can claim up to Rs. 2,00,000 interest amount as tax-deduction
• In case of a rented property, you can claim the entire amount of interest paid on a home loan is as a tax benefit.
• Interest paid on the home improvement loan gets a tax deduction for up to Rs. 30,000.

Personal Loan used to invest in a business:

If you have taken a personal loan for investment into business, the interest paid on the loan is considered as an expense, and hence would get deducted from the gross revenue.This, in turn reduces in the net taxable profit of the business, thereby lowering the tax liability.

Personal Loan used for purchasing an asset:

If a Personal Loan is used to purchase an asset then you do not become eligible for tax deduction immediately but at the time of sale of that asset.If the personal loan is used to buy assets like property, jewellery, shares, etc., the interest paid on the loan would eventually sum up as the cost of acquisition of the asset. The amount of tax deducted gets added to the cost of acquisition and will become available once you sell that asset.

• When you take a personal loan, it is not taxable as the loan is not considered as an income.
• In order to be eligible for claiming tax deduction on the interest paid on your personal loan, one must submit adequate-proof to income tax authorities to support the claim in the form of a bank certificate or auditor’s certificate.
• In order to claim tax benefit on a personal loan, one should keep a copy of all the important documents like expense vouchers, auditor’s report and bank certificate, etc. as they might come in handy while submitting them to income tax authorities for assessment.

If you want to take a personal loan and avail of tax benefits on that personal loan, you have come to the right place. Please note that the tax deductions will only be applicable on the interest rate and not on the principal loan amount. Here are the three possible cases where you can easily avail of tax benefits on personal loans.

Invest in a business

Personal loan tax benefits can be easily availed of by you if you invest in a business. If you have decided to use the personal loan amount to invest in a business, the interest that was paid by you can be claimed as your expense. If you do this, it will bring down your tax liability as a borrower. It will also reduce the net taxable profit of the business that you invested in. The good news that comes with this is that there will be no cap on the amount that you can claim as your tax benefit when you invest in a business.

Invest in assets

The second possible case where you as a personal loan borrower can avail tax benefits is when you invest in certain assets. You can invest in assets like gold jewellery, shares, non-residential properties, stocks and many more to get the tax benefits for your personal loan. You will not be able to claim the deduction in the same year you paid the interest, but it would be easily added to the cost of acquisition. You can claim the tax benefit in the year when you sell the asset.

Invest in purchasing or in constructing a residential property

You as a borrower can claim tax benefits if you plan to use your personal loan money to buy a residential property or for the residential property construction. Under the Income Tax Act of 1961 (section 24), for the repayment of the interest of the same, you as a borrower can avail of tax benefits.The maximum amount of a tax deduction that you can expect to be deducted in this case is not more than rupees 2,00,000 (rupees two lakh only) only if that is occupied by you (as a borrower). In case the same house has been rented out to someone else other than the borrower, there is no limit or no cap on the amount you can claim. You can claim tax deductions only if you are the owner of the said house.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.