As the name suggests, personal loans cater to individual financial requirements such as home improvement, business investment, addressing emergency medical situations, or funding wedding expenses.
These loans are unsecured, eliminating the need for collateral, which results in a relatively higher interest rate. Moreover, personal loans typically come with a short repayment period and lenient eligibility criteria, facilitating easy access.
Many individuals inquire about potential tax advantages linked to personal loans, and this article aims to explore and clarify this aspect.
Here, we will explore all aspects of personal loans and how they may be a useful tool for negotiating the complex world of tax planning and optimisation, in addition to providing the money required for personal development.
Income Tax Benefit on Personal Loan
Tax exemptions and deductions are available for personal loans. However, these tax benefits are only available under specific conditions. Here are a few situations in which you can claim tax benefits on a personal loan.
| End-Use of Personal Loan | Borrower Implication | Exemption/Deduction Limit |
| Home Improvement | Claimed as Tax Deduction under Section 80C | Up to ₹1.5 lakhs |
| Purchase/Construction of Residential Property | Claimed as Tax Deduction under Section 24 | Up to ₹2 lakhs |
| Business Investment | Reduces Net Taxable Profits | No Limit |
| Asset Purchase | Reduces Capital Gains on the Sale of the Asset | No Limit |
Home Improvements
A personal loan taken for home repair may be eligible for a tax deduction of up to ₹1.5 lakh every financial year under Section 80C of the Income Tax (IT) Act. Therefore, you can take advantage of the tax savings on a personal loan if you are using the money for home improvements or renovations.
Purchase or Construction of Residential Property
Section 24 of the IT Act enables you to claim a tax deduction for a personal loan of up to ₹2 lakh in a financial year if you are taking a personal loan to buy or modify a residential property. However, this advantage can only be claimed by the property owner.
Business Investment
The interest portion of a personal loan may be written off as a business expense if the funds are used for business purposes. By doing this, the business owner may be able to lower their net taxable profits and, thus, their income tax obligation.
Asset Purchase
If a personal loan is used to buy assets like jewellery, stocks, shares, non-residential real estate, and so on, the loan proceeds may be secured from taxes. The cost of purchasing the asset could include the loan’s interest component. This helps in lowering the asset’s capital gains upon sale.
How to Claim Tax Benefits on Personal Loans
| Area of Deduction | Section of Income Tax Act | Maximum Deductible Amount | Conditions |
| Principal Amount | 80C | ₹ 1,50,000 | Possession of house property must be retained for 5 years at least before sale. |
| Interest | 24B | ₹ 2,00,000 | Only construction loans are allowed, with a limit of 5 years for the completion of the construction |
| 80EE | ₹ 50,000 | The loan must be above ₹3,00,000, and the property value must be less than ₹50,00,000 | |
| 80EEA | ₹ 1,50,000 | The stamp value of the property must be less than ₹45,00,000 | |
| Stamp Duty | 80C | ₹ 1,50,000 | Claims are possible only in the same year as expenses. |
Conclusion
The ways in which personal loans and tax benefits are intertwined highlight the opportunity that individuals have for active financial planning. Borrowers can make well-informed decisions that go beyond short-term financial relief by understanding the nuances of tax concerns related to personal loans.
LoanTap Personal loans can be used for a variety of purposes, such as house upgrades or medical emergencies, which makes them useful instruments in the wider realm of financial management. When exploring the constantly changing world of personal finance, it is critical to be aware of potential tax benefits.
FAQs
Is there a maximum income limit to qualify for tax benefits on personal loan interest?
Ans. Income limits may vary by jurisdiction, so it’s essential to check local tax regulations for specific details.
Can joint loan applicants both claim tax benefits on the same personal loan?
Ans. Yes, both parties on a joint loan may be eligible for tax benefits, subject to meeting the specified criteria.
Do tax benefits on personal loans apply to self-employed individuals?
Ans. Yes, self-employed individuals may be eligible for tax benefits on personal loans if the funds are used for business-related expenses.
Can I claim tax benefits on personal loans used for personal expenses like travel or entertainment?
Ans. No, generally, personal expenses are not eligible for tax benefits. The loan must be used for specific qualifying purposes.
Can I show my Personal Loan in ITR?
Ans. Your income tax returns can include your personal loan. Personal loans for tax-deductible purposes like higher education, home renovation, or business expansion can be deducted. Section 80C and 24 of the Income Tax Act can provide tax benefits on personal loans.
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