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.

Are Personal Loans taxable?

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.

Tax Benefits on Personal Loans

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.

Important Points to be noted regarding tax benefits on personal loan


  • 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.

Learn more about your Personal Loan Eligibility here.

DISCLAIMER

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.



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