A personal loan is one of the easiest loans to avail as it can be used for a variety of purposes and it comes with low documentation needs. Some of the commonly used purposes for availing a personal loan are meeting medical emergencies, travel expenses, paying school/college fees, buying a gadget, home renovation, or improvement, or even meeting business fund requirements.
Moreover, personal loans do not need collateral and are disbursed faster than other loans which makes it a popular choice of funding for many.
But the general perception of personal loans is that it doesn’t allow Income Tax benefits like a home loan or an education loan. But you are wrong! There are 3 cases under which you can avail of income tax benefits even when you avail of a personal loan.
It is good to know that these tax benefits are not available for availing a personal loan rather they are available when you use your personal loan for certain purposes.
1. Use of Personal Loan for Purchase, Improvement, or Construction of a Residential Property
Everyone knows that when you avail of a home loan for any of the above-mentioned purposes, you get Income tax benefits on the interest portion as well as the principal amount.
But, it is not commonly known that a part of these benefits can be availed even when you use a personal loan for purchase, improvement, or construction of a home. When you use a personal loan to finance any of the above-mentioned reasons, you get to claim the interest paid on the personal loan as an Income Tax benefit.
The interest amounts that you can claim as a benefit will depend on the home bought. If it is a self-occupied property or a property that is rented out, you could claim up to Rs 2 lakh as interest paid on the personal loan.
From the current financial year (2020-21) a new tax regime comes into effect. If you have chosen to go with the new regime, then there is no deduction available for interest paid on the self-occupied property, but the interest deduction continues on rented property.
However, the principal repayment of a personal loan cannot be claimed as a deduction under Sec 80C which is allowed for a home loan.
But the personal loan should be borrowed from a proper source like a bank, NBFC, etc and you should have proper documentation of the loan to be shown as proof.
2. Investment in Business
Very often business expenses are funded out of a personal loan, especially during the initial stages of business. A personal loan a seeding fund for establishing your business or even expanding your business. A personal loan works well for any purpose as business loans are difficult to avail for small businesses.
Did you know the interest paid on a personal loan can be shown as a deductible expense of the business/company? Doing so can help you reduce the tax liability of the business as interest payments are a tax-deductible expense for businesses.
3. Investment in Assets
As a personal loan has no fixed end-use purpose, it could be used to buy assets like jewelry, stocks & shares, non-residential property, etc. The interest paid on a personal loan cannot be claimed as a deduction but is eligible to be added to the cost of the acquisition of these assets. You can also check here about how long to keep tax records.
When you sell these assets, you are bound to calculate capital gains on which a tax is payable. It can either be short-time capital gains or long-term capital gains depending on your holding period of the asset. Both types of capital gains are liable to Income Tax.
By adding interest costs to the cost of acquisition, you can bring down capital gains and the tax paid on capital gains.
If the personal loan has been used for any other purpose, then you wouldn’t be eligible for any income tax benefit. So an easy personal loan can be availed for any of the purposes mentioned above and you could avail benefits on Income Tax.
Is the Amount Availed As Personal Loan Taxable?
This is also a doubt in the minds of many borrowers. It is good to know that the amount availed as a personal loan or any loan is not added to your income for that year. Any loans availed during any financial year needs no mention on your Income Tax Return or anywhere else.
It is always good to avail of loans from established sources like banks, NBFCs or fintech lenders or else there are chances that the loan may be included as your income.
