When Can You Avail of Tax Benefits on a Personal Loan?

A personal loan is an excellent tool to meet your short-term goals. It’s easy and convenient to acquire and will help you fulfill your needs. Other than low personal loan interest rates, one of the primary reasons people take a personal loan is to receive funds instantly. It’s also helpful to know that a personal loan comes with tax benefits. The Income Tax Act of India permits tax deductions on loans; however, the benefits depend on the purpose and usage. You are exempt from tax if you use the loan amount for any of the following purposes:

  1. Use a personal loan for business expenses

Numerous small companies, start-ups, and entrepreneurs prefer applying for a personal loan over business loans because they’re hassle-free, and approvals are faster. If you use a personal loan for business-related expenses like expanding your operations, buying equipment, or increasing working capital, the interest you accrue on the loan amount is treated as an expense for the business, and you can claim tax benefits. It will be adjusted with the gross revenue and profits of your company.

You can deduct the relevant interest of the loan from the net profit of your company and pay tax on the remaining profit.

  1. Use a personal loan for home improvement or renovation

You can claim tax benefits when you use a personal loan for renovations or improvements for your home. The maximum amount for this is Rs. 30,000.

The cost of renovating a house can be quite high, so to ensure the expenses are within your means, you can use a personal loan EMI calculator to help you determine how much your EMIs will be every month to see if it makes sense to take a loan for you.

  1. Use a personal loan for expenses related to housing

Section 24 of the Income Tax Act states that the interest component of a personal loan for property-related expenses like buying or construction is exempt from tax. The cap on this for a self-occupied house isRs. 2,00,000, whereas a rented property has no such limits. It’s also applicable if you decide to live in the house that you’ve just constructed.

  1. Use a personal loan for purchasing assets

It’s financially wise to have an assortment of assets, particularly something you can fall back on during emergencies or unforeseen events. It’s not unheard of to take a personal loan to buy valuable assets, including jewelry, car, or shares. If you have a similar intent, then the personal loan interest rates fall under the umbrella of the cost of acquisition.

However, you cannot gain any benefits the year you purchase, but only the year when the asset is sold. When you sell, the personal loan’s interest quota brings down the capital gains you earn from the sale, thereby lessening the taxable amount. So, the sum of tax you pay decreases as well. Under this provision, you aren’t directly eligible for tax deductions.

Note: No matter what mode you want to claim, you must have proper documentation to be eligible for this tax benefit. The documentation has to show you used the money for a specific purpose.

The next time you think about applying for a personal loan, remember the benefits. At the same time, don’t forget that only the sum you pay towards personal loan interest rates is eligible for tax benefits. With these points in mind, your experience of borrowing will be worth every penny!