Tax Benefit On Personal Loan: How To Claim?

Personal loans are a versatile financial resource in India, providing quick solutions for various personal needs like home improvement, education, or medical emergencies. Interestingly, apart from meeting immediate financial needs, personal loans also offer potential tax benefits, a fact often overlooked by borrowers.

With the advent of personal loan apps in India, securing funds has become incredibly easy. These apps simplify the process, offering quick access to money for diverse purposes. But beyond the convenience of obtaining these loans, there are tax-saving opportunities that many borrowers can leverage. This article explores scenarios where personal loans can offer tax benefits and how to make the most of them.

What Are Personal Loans?

A personal loan is an unsecured loan that does not require any collateral. These loans typically come with higher interest rates and shorter repayment terms compared to secured loans like home or car loans. While personal loans are flexible in their usage, they don’t inherently provide tax benefits like home loans or education loans. However, the intended use of the loan can determine your eligibility for certain tax deductions.

Tax Benefits of Personal Loans

1. Home Renovation

If you’ve taken a personal loan to renovate or repair your home, you may be eligible for a tax deduction under Section 24(b) of the Income Tax Act. This provision allows you to deduct the interest paid on the loan from your taxable income, with a maximum deduction limit of ₹30,000 per year. Proper documentation of renovation expenses is crucial for claiming this benefit during tax assessments.

2. Home Purchase or Construction

Using a personal loan to purchase or construct a residential property also qualifies for tax benefits under Section 24(b). The deductions differ depending on whether the property is self-occupied or rented out:

• Self-occupied property: Deduction of up to ₹2,00,000 annually on interest paid.

• Let-out property: The entire interest amount is eligible for deduction.

These benefits can significantly ease the financial burden of buying or constructing a home.

3. Education Expenses

Personal loans used for education purposes can also yield tax benefits. Under Section 80E of the Income Tax Act, you can claim a deduction on the interest paid for education-related loans. While personal loans aren’t explicitly mentioned in this section, loans exclusively used for education, with proper documentation, can make you eligible. This deduction can be claimed for up to eight years or until the loan is repaid, whichever comes first.

4. Starting a Business

Entrepreneurs can utilize personal loans to fund their business ventures. The interest paid on such loans can be claimed as a business expense under Section 37 of the Income Tax Act. To avail of this benefit, you must provide proof, such as receipts or invoices, showing that the loan was used for business purposes. This deduction helps reduce the taxable income of the business, thereby lowering the overall tax liability.

5. Investment in Assets

If you use a personal loan to invest in assets like jewellery, shares, or non-residential properties, the interest paid may qualify for tax deductions under Section 80C of the Income Tax Act. The interest amount can be added to the cost of acquiring the asset, offering future tax benefits when the asset is sold. Ensure proper documentation to substantiate the claim.

Steps to Claim Tax Benefits

To successfully claim tax benefits on personal loans, follow these steps:

1. Maintain Documentation: Keep receipts, invoices, and other documents proving the loan’s use for specified purposes like home renovation, education, or business.

2. Track Payments: Record all loan payments, including details of principal and interest.

3. Consult Experts: Seek advice from a tax consultant to ensure you’re claiming all eligible deductions.

4. File Accurate Returns: Include all necessary details and submit supporting documents when filing your income tax returns.

Conclusion

While personal loans don’t inherently come with tax benefits, their intended usage can unlock significant tax deductions, reducing your overall tax liability. Whether it’s renovating your home, funding education, purchasing property, or starting a business, understanding and leveraging these benefits can help you make smarter financial decisions.

Stay informed about the latest tax regulations and consult with professionals to optimise your benefits. By strategically using personal loans, you can achieve your financial goals while enjoying valuable tax savings.