What Are The Tax Benefits Of Personal Loans?
Author : Shweta Dutta | Published On : 30 Dec 2021
Banks and financial institutions have several benefits for people who borrow money and pay off loans on time. Tax benefits are associated with almost all types of loans in India. The government’s initiative for the benefit of people has another face in the form of tax deductions.
A personal loan tax deduction is not possible for all types of personal loans. However, there are some selected cases where it is allowed. In this article, we will be assessing the instances where it is permitted. Also, we would be defining the conditions where an instant loan for salaried or self-employed can fetch a tax benefit.
What are Personal Loans?
Personal loans are unsecured loans and are availed for fulfilling short-term financial needs. Personal loans are very easy to apply for in the short term. However, the tenure also depends on the preference of the borrower. Lenders mainly approve personal loans within 24 hours of application, and such loans are also disbursed instantly. Personal loan tax deduction enables borrowers to gain more than just money through a loan.
A personal loan can be availed for fulfilling several purposes such as medical expenses, wedding expenses, clearing debts, etc. The lender cannot control how the loan amount is used; it is up to the borrower. As they are unsecured, you do not have to produce collateral while borrowing money. Lenders have different conditions under instant loans for salaried individuals and self-employed.
What are the Tax Benefits on Personal Loans?
The Government of India has come up with incentives, time and again, for the betterment of the commoner. Personal loans are a way to empower people to borrow money to help the economy by indulging in a healthy flow of cash. A personal loan is paid off over time, which does not put any pressure on your finances. The government has made provisions to provide a tax deduction for people who avail of personal loans from public or private lenders.
An instant loan for salaried or self-employed individuals may be subjected to tax deductions in special circumstances. Although there are plenty of reasons you can take a personal loan, the government only recognizes specific uses of the borrowed money deductible from taxes.
Personal loan tax deduction as per the Income Tax Act, 1961 is enforceable in three cases, namely,
1. Personal Loan for Business Commencement: As per the provisions of the IT Act, personal loans availed for business commencement or enhancement are permissible to receive tax deductions. If you are one of those people who want to avail of a personal loan for business expansion, you will receive deductions on the interest that you pay for the loan. You can also claim deductions in the principal amount paid by you to your lender.
2. Personal Loan for Purchase or Construction of House: Tax deductions for an instant loan for salaried or self-employed individuals are also provided on personal loans for purchasing or renovating a house. If you have availed of a personal loan to invest in a house, you would be eligible to receive deductions in taxes. Home renovations and purchases are considered tax-exempt as per the Income Tax Act, 1961. If the house in question is your residence, up to Rs.2 lakh tax deduction under Section 24 (b) can be claimed. If the property is rented, the total interest paid by you would be deducted from your taxable income. In the latter case, there is no limit on the amount of deduction received by the borrower.
3. Personal Loan for Purchase of Assets: The last case in which a personal loan fetches tax deductions is available for asset investment. If you have borrowed money for buying jewelry, shares, stocks, or some other kind of assets, a personal loan tax deduction would be awarded to you in the year following loan disbursal. In The first year, the interest paid would be added to your acquisition cost. In some cases, borrowers claim their deduction when they sell the concerned asset to another party.
If you have accurate information about the various deductions on your taxable income, you would be saving more money. With the help of the above article, you would be able to prepare yourselves for claiming tax benefits wherever you are entitled.