Instant personal loans are one of the best ways to secure funds immediately. Thanks to the arrival of online lenders like PaySense, you can now avail personal loans quickly, without leaving the comforts of your home.
Personal loans come in handy in plenty of situations like emergency medical expenses, marriage planning, overseas holiday trips with your family and friends, purchasing gadgets like mobile phones, cameras, upgrading the amenities of your home like washing machine, TV, AC, renovating your home and more.
There’s no doubt that an instant personal loan is the best way to overcome monetary shortfalls. But, then we come to the question, do personal loans offer tax benefits too?
Well, the answer depends on the purpose you use your loan amount for. Here, in this post, we explain all the tax implications of personal loans. Let’s get started.
Is a Personal Loan Taxable in India?
Generally, the amount you borrow is not taxable. That is, it need not be added to your taxable income while filing income tax returns. However, you have to ensure that you borrow the loan from a valid lender like a bank, NBFCs, or other professional lenders.
Informal loans borrowed from friends and family, or other unknown sources are considered as a part of your income, and you have to pay tax on it.
Do Personal Loans Offer any Tax Benefits?
The short answer – the availability of tax benefits, depends on the usage of the loan amount.
The long answer:
A personal loan can be divided into two components:
- Principal – This is the amount the lender provides you. You can use this amount for any purpose.
- Interest – This is the amount the lender charges you as a fee, on top of the principal.
While repaying the personal loan, you have to pay back the principal as well as interest.
Now, coming to the taxation rules:
The Indian Income Tax Act (ITA) does not explicitly mention anything about personal loans. However, the Income Tax Act offers tax benefits for other loans like education loans, home loans, etc.
This doesn’t mean you cannot avail tax benefits when you take a personal loan. Since the ITA doesn’t mention personal loans explicitly, the purpose of usage of the loan is considered to enjoy tax deductions.
You can enjoy tax exemptions on the interest amount you pay for the personal loans if the loan amount is used for any one of the following four purposes:
- For the construction of a Residential Property
Let’s say; you are in the process of constructing a home. Your construction cost overshoots your initial budget, and you take a personal loan to bridge the shortfall. In this scenario, you are eligible for tax deductions on the interest component of the personal loan.
According to Section 24(b) of the ITA, you can enjoy tax benefits up to Rs. 2 lakhs for the interest paid on your personal loan, if you use the loan amount for the construction of a residential property. This tax benefit is applicable only when you reside in the home you’ve just finished constructing.
- For Renovation or Improvement of a Residential Property
Let’s say, your home needs repairs and you take a personal loan to avail the funds. In such cases, you can enjoy tax deductions on the interest component of the personal loan you have availed.
However, remember that you have to submit proof showing that you have used the loan amount specifically for home improvement/renovation works. So, make sure to store all bills and receipts carefully, if you plan to avail tax deductions later on.
The maximum amount of tax deductions for personal loans used for home improvement/renovation is Rs. 30,000.
- For Business Purposes
You can use a personal loan to meet fund requirements of your business like – stocking inventory, purchasing equipment, expanding the scope of the company, paying salaries, etc. In such cases, the interest component of the personal loan is considered as a business expense, and you can deduct this amount from the gross profit or revenue of your business.
This reduces your overall taxable income, thereby reducing your tax liabilities. When you use a personal loan for this purpose, there is no upper limit on the amount of tax exemption.
- For Purchasing an Asset
If you use the personal loan amount to purchase an asset, based on the asset you are buying, you can avail tax deductions. For instance, let’s consider that you use the personal loan funding to purchase an immovable asset like property, land, or jewellery – then the interest you pay for the personal loan is added to the total cost of acquiring the asset. You don’t enjoy any tax deductions during the purchase of the asset.
However, at the time of selling the asset, your overall capital gains liability is reduced, thus, reducing your taxes. In this case, there is no limit on the amount of tax you are exempted.
Check Out: Best Instant Personal Loan Apps in India
Though personal loans are not tax-saving instruments directly, you are eligible for tax deductions based on the purpose of usage. Make sure to understand all the taxation rules regarding personal loans and enjoy tax benefits, if applicable in your situation.
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