Can You Get Tax Benefits on Personal Loans?

Personal loans offer a convenient and flexible way to access financial assistance for a variety of purposes. Whether you want to pay for home renovation or repairs, manage travel, or emergency, or plan a special event like a wedding, personal loans provide the funds you need.

Personal loans tend to have a higher interest rate since they are unsecured and do not require any collateral. Despite this, their ease of access and versatility make them an attractive choice for many people looking to borrow money.

Is the Personal Loan Amount Taxable?

It's important to note that the funds you receive from a personal loan are not considered a part of your income. This means that you will not be required to pay any income tax on the loan amount.

However, this only applies if you take out a loan from a bank or a recognised Non-Banking Financial Company (NBFC). On the other hand, if you obtain a loan from other sources, such as a family member, it may be considered part of your income and could be taxed accordingly.

Investment Loans with Tax Benefits

1. Loans for Home Renovation / Purchase of Home

When it comes to taxes, personal loans used for buying a new home or renovating your current home do not qualify for any exemptions. On the other hand, home loans taken to purchase a home are certainly exempt from taxes. If you live in a house that you own, you can claim deductions of up to ₹2,00,000. If you rent out the property, you can subtract the total interest paid on the loan from your taxable income. It's important to keep all relevant records showing how the loan was utilised to take advantage of the tax benefits.

2. Loans for Business Purposes

Business term loans that are supported by assets like land, securities, or other property may have a tax exemption to some degree. The interest paid on the loan amount can be claimed as a tax deduction under section 36(1)(iii) of the Income Tax Act. Business purposes include expenses incurred for running and maintaining the business, such as purchasing raw materials, paying salaries, rent, and other overhead expenses. The deduction is available for the financial year in which the interest is paid and can be claimed against the business income. On the other hand, personal loans or unsecured business loans do not provide any tax advantages.

3. Personal Loan for Assets

Investing in assets such as shares, gold, jewellery, vehicles, and non-residential real estate can be a great way to grow your wealth. If you need financing for these purchases, there are specific financial products available that can offer tax benefits. However, it's important to note that taking out a personal loan for these investments does not come with any tax advantages.

Some Other Loans That Can Offer You Tax Benefits Include:

1. Education Loan

An education loan is another investment loan that offers tax benefits. The interest paid on an education loan is eligible for tax deductions under Section 80E. There is no maximum limit on the deduction, and it can be claimed for a maximum of 8 years or until the interest is fully paid, whichever is earlier.

2. Car Loans

A Car Loan is a simple and effective way to acquire the car of your dreams. What's more, if you're a self-employed professional or a business owner, you can also benefit from tax deductions on the interest paid on your Car Loan. To be eligible for this deduction, you must show the loan in your business or professional books and claim the interest paid on the Car Loan as a deductible expense under Section 43B of the Income Tax Act. To ensure you have all the necessary documentation to claim this deduction, it's important to request an interest certificate from your bank for your Car Loan.

Things to Remember

1. A personal loan is separate from your income and therefore, it is not subject to taxes.
2. Unfortunately, this type of loan does not offer any tax benefits. The only loans that may offer tax benefits are those that are backed by collateral and used for specific purposes, such as a home loan or a secured business loan.

Final Thoughts

Taking a loan and taking advantage of tax benefits can be an effective way to save money. Doing research on the best type of loan for your financial situation and understanding the tax benefits available to you is key in making sure you get the most out of your money.

Loans may not be the right choice for everyone, but they are a great tool when used wisely.