How to Claim Tax Benefits on Personal Loans in India

Personal loans don’t offer blanket tax breaks. However, if the funds go toward eligible uses, including buying or renovating a home, higher education, or business needs, you can claim certain tax benefits on a personal loan. It can result in major savings up to ₹1.5 lakh under Section 80C or ₹2 lakh under Section 24(b).

The challenge is that many borrowers fail to link their loan’s end-use to the correct tax section or don’t maintain the proof needed to support their claim.

If you are looking for smarter ways to reduce your tax burden, it helps to know how personal loans fit into your long-term finances. Also, when you need quick credit, you can always compare options through the best instant personal loan apps in India, helping you borrow confidently and securely.

This article offers a simple guide to map your loan use to the right tax section, file deductions correctly, and avoid common mistakes.

Which Personal Loan Uses Are Eligible for Tax Benefits?

Here is a detailed explanation of the areas in which the income tax benefit on personal loans is applicable under the current 2024–2025 regulations.

1. Section 80C: Home Construction or Purchase (up to ₹1.5 lakh)

Section 80C allows you to claim principal repayment if you use the loan to build or purchase a residential property, with a maximum of ₹1.5 lakh per fiscal year.

1. Section 24(b): Interest Deductions up to ₹30,000 for Home Renovations or Repairs

The interest component of a personal loan used for home improvement, repair, or renovation is deductible under Section 24(b). For self-occupied homes, the overall cap under this section is ₹2 lakh. However, claims about renovations are typically capped at ₹30,000.

1. Section 80E: Higher Education (Interest-only Deduction)

If you take a personal loan for higher education expenses, either for yourself, your spouse, or your children, the entire interest paid can be claimed for personal loan deduction in income tax under Section 80E. There is no upper limit. But the benefit is time-bound and available for up to 8 years.

1. Business Use: Interest as a Deductible Business Expense

Using a personal loan for business purposes makes the interest paid fully deductible as a business expense. This benefit, which also comes under section 80E, lowers your taxable business income. This can offer significant relief for self-employed individuals or small business owners.

1. Non-Eligible Uses: No Tax Benefit

Personal loans used for weddings, travel, medical expenses, or general consumption do not qualify for any income tax benefit. These are treated as personal expenses and are not considered tax-deductible.

How to Claim Personal Loan Deductions in Your ITR: Step-By-Step Process

Claiming tax benefits on a personal loan is straightforward if you follow the right steps. Here’s a simple roadmap:

Step 1: Map the End-Use to the Appropriate Tax Section

Determine the initial goal of your personal loan. Connect it to the section on the right (as mentioned in the previous section as well):

• The 80C is for the purchase or construction of a home.
• 24(b) is for the interest paid on home improvements.
• 80E is for the interest paid on school loans, or business expense deduction (loans taken out for business purposes).

Proper mapping guarantees the validity of your claim.

 Step 2: Gather Backing Documentation

Keep accurate records to support your assertion. Important records include the loan agreement, interest certificates, invoices or receipts, and any loan-related fee receipts. If the tax authorities are looking for proof, accurate documentation is necessary.

Step 3: Compute Eligible Amounts vs Limits

Check the maximum allowable deduction for each section. As of now (year 2025), it is ₹1.5 lakh for Section 80C, ₹30,000 (or up to ₹2 lakh overall) for Section 24(b), and interest under Section 80E for education. Only the amounts within these caps can be claimed.

Step 4: Choose the Right Tax Regime

Most personal loan deductions in income tax are available under the old regime. Ensure you select this regime while filing to claim maximum benefits. New tax regime filers may lose eligibility for several deductions.

Step 5: Keep Records and Report in Your Income Tax Return (ITR)

Lastly, complete the appropriate schedules and fields in your ITR that correspond to the deduction section. All supporting documentation should be kept secure for audits or future use. You can ensure a seamless claim procedure by accurate reporting.

What are the Common Errors When Claiming Income Tax Benefit on Personal Loan and How to Avoid Them?

Even if you know personal loans can save you tax, simple mistakes can mess with your claim. Here’s how to avoid these pitfalls and make sure you claim every rupee you are eligible for:

1. Forgetting to Track How You Use the Loan

It’s easy to mix personal spending with eligible expenses. If you don’t separate them, your claim can get rejected. Keep a simple record of what you spend and link each expense to the right tax section. It makes life much easier during filing.

1. Picking the Wrong Tax Regime

Many people unknowingly opt for the new tax regime and miss out on deductions. Most personal loan benefits are available under the old regime. So, double-check before you file to get the maximum relief.

1. Losing Important Documents

You need interest certificates, invoices, and fee receipts to back your claim. Misplacing these can mean a missed personal loan deduction in income tax. A small folder or digital scan folder can save you a lot of stress later.

1. Mixing Up Principal and Interest Deductions

The rules treat principal repayments and interest differently. Principal goes under Section 80C, while interest is claimed under 24(b), 80E, or as a business expense. Keeping them separate avoids confusion and errors.

1. Trying to Claim Non-Eligible Expenses

Expenses like weddings, travel, medical bills, or general shopping aren’t eligible for tax deductions. Only claim for approved purposes like home, education, or business to stay safe and compliant.

Personal loans can help you manage expenses and save on taxes if used wisely. The key is to link each loan to the right purpose, keep proper records, and choose the correct tax regime. By tracking your spending and avoiding common mistakes, you can maximize tax benefits on a personal loan without stress.

A little planning and organization go a long way in making your loan work smarter for both your finances and your taxes.