March 30, 2020

All you need to know about tax benefits on a personal loan

benefits on a personal loan

benefits on a personal loan

A personal loan is one of the best loan products in India that helps you cater to your emergency financial requirements in an easy way. The loan being of unsecured type does not need you to provide any collateral or security and can be availed based on your creditworthiness. Your personal loan eligibility is determined on the basis of your credit score and repayment record that has a huge impact on the loan amount and the interest rates you are eligible to get. The interest rate on a personal loan is on a higher side in comparison to secured loans as lenders do that to cover the risks of possible defaults in the future. You can avail a personal loan up to Rs. 40 lakhs in India without providing any security or collateral. Unlike other types of loans, a personal loan does not offer you any tax benefits under the Indian Income Tax Act. However, the tax benefit can be claimed depending on the purpose you have taken the loan for.  

Tax Benefits on Personal Loan in India

As per the Indian Income Tax Act, one can avail tax benefit on interest paid towards the personal loan amount if the money is utilized for the following reasons:

  • Personal loan for home improvement
  • Personal loan for business
  • Personal loan for the purchase of any asset
  • Personal loan for the purchase of any property or construction of a property 

Personal loan taken for house

Section 24 of the Income Tax Act allows you to claim deduction on interest paid towards the personal loan taken for buying or construction a property. You can claim deduction up to Rs. 1,50,000. Tax benefits up to Rs. 2 lakhs can be availed for buying a new home or renovating the self-owned house. For loan availed for rented property, there is no limit on the maximum amount up to which you can claim the deduction. You can avail tax deduction up to Rs. 30,000 on personal loan used for home renovation purpose.

Personal loan taken for business purpose

If the personal loan amount you take is utilized for investing in a business then you can avail tax benefits under the Income Tax Act. There is no capping on the amount you can claim deduction on.  

Investment in assets

When you avail a personal loan to invest in assets like share market, jewellery, non-resident property and others, you can avail tax deduction towards the interest you pay on the loan. However, the deduction cannot be claimed in the same year in which the interest is paid and can be availed only at the time of selling off the asset.  

Things to keep in mind while availing tax benefit on a personal loan

  • The personal loan amount availed is not taxable as the amount received is not a part of your income
  • Tax deduction can be claimed only towards the interest paid on the personal loan amount
  • To avail tax deduction on a personal loan, you need to provide adequate proof to the income tax department to support the claim.
  • You will have to provide documents like sanction letter, expenses vouchers, auditor’s report and bank certificate to claim deduction towards interest paid on a personal loan.
  • The tax benefit that you can avail on the personal loan depends on the usage of the loan amount.  

Applying for a personal loan in India

Getting a personal loan in India has become convenient all due to the advent of online lenders that offer quick personal loans starting at EMI as low as Rs. 2500/lakh. To get a personal loan in India, follow the below steps

  • Visit a personal loan lender’s website or download an instant personal loan app from Google play store or iOS store.
  • Submit your personal and professional details
  • Complete KYC
  • Upload documents. You will have to submit one address, identity proof along with your income documents.
  • On approval, submit additional details
  • The loan amount is then disbursed into your account within 24-48 hours.

Availing a personal loan in India can help you reap great tax benefits if you utilize the loan amount for the purpose of education, home renovation, business investments or purchase of any assets. Personal loans aren’t particularly tax-saving instruments in comparison to home loans and education loans. Depending on your usage of the loan amount, you are eligible to receive tax exemptions towards the personal loan. However, before applying for a personal loan it is important that you have a good credit score and meet all the eligibility requirements to ensure that your loan application status is not rejected or approved at high-interest rate. You can also use a personal loan EMI calculator to get an estimate of the amount you are eligible to receive. Before you opt for a personal loan, it is also necessary that you choose an amount that you can pay for to ensure you don’t end up in a debt trap.

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