Decode the tax benefits on personal loan
New Delhi : It is well-known that the Indian Income Tax Act-1961 allows various deductions and exemptions when computing your tax liability. Usually, a person would plan this in advance and work around the deductions in a way that can minimize his tax liabilities. There are many tax-saving instruments and investments that can help you save on your taxes. You just have to declare them while filing your taxes.
A personal loan is one of an entity that can save a part of your wealth from the tax deductions. Usually, a person avails a personal loan when there is an urgent need for funds. Personal loans are typically unsecured loans that can be used for any of your personal financial needs. Securing a collateral-free personal loan is very easy as long as you have a decent credit history.
Generally, there are no exemptions allowed as tax benefits on personal loans - whether it is the principal amount or the interest paid on the loan. So, unlike education loans - for which the interest paid is available for deductions as clearly stated in the Income Tax Act, the same cannot be said for all variants of personal loans.
However, some variants of personal loans do come with tax benefits. Let’s discuss those in detail.
The first case which qualifies a personal loan for tax benefits is the one drawn for investment in a business.
If you have borrowed a personal loan with the intention of investing in your business, then the interest paid upon the repayment of the loan can be claimed as an expense. Also, there is no set exemption limit on the interest amount that can be claimed as a deduction.
The second case in which deduction is allowed is in the case of investment made for the purchase or construction of a residential property. So if you have borrowed a personal loan and the proceeds from the loan have gone into either helping you purchase a residence or to develop the residence, then you are allowed to avail tax benefits on personal loan for the interest payment made as a part of the repayment, as per the provisions of Section 24 of the Income Tax Act, 1961. There is a cap on the maximum amount of interest that you can claim as a tax deduction under this head, amounting to Rs 2 lakh if you are occupying the residential property. Thus, if you are planning to construct or refurbish a property for personal residential use and planning to borrow a personal loan for this purpose, you need to obtain a certificate from your bank, which will certify the purpose for which the loan was used and then claim your deduction.
The third case under which tax benefits are applicable on a personal loan is when the proceeds from the personal loan are diverted to an asset. If there has been an investment in any asset like jewellery, non-residential property, shares, certain stocks, etc, then the interest you pay for the personal loan will be added to the cost of acquisition of this asset. This, in turn, reduces the capital gains on the asset at the time of its resale. You will not be able to claim the tax deduction on the interest amount in the year in which you pay but rather in the year in which you will sell the asset in the future. There is no limit to the amount which you can claim as an exemption in this case, where the loan amount is used to purchase assets. So when you sell that asset and have capital gains, you can deduct the cost of acquisition (including the interest) as per Section 48 of the Income Tax Act.
Here again, the tax deduction is applicable only to the extent of the amount of the interest paid by you, and not on the principal loan amount repayment.
If you have drawn a personal loan for any of the aforementioned purposes, then you can claim a tax deduction for the amount of interest paid as a part of the repayment cycle. If you are planning to borrow a personal loan, opt for the Bajaj Finserv Personal Loan on Finserv MARKETS. You can avail instant personal loans of up to Rs 25 lakh with zero collateral and flexible repayment schedules! Additionally, you can also avail of minimum documentation requirements, loan approvals within 3 minutes and lightning-fast disbursals within 24 hours.