A personal loan is an unsecured loan, which is not backed by any collateral and can be used for any purpose. Banks and other lending institutions sanction personal loans based on the borrower’s income, credit score and other factors.
There are numerous benefits to taking out a personal loan. Perhaps the most obvious benefit is that a personal loan can provide individuals with much-needed funds in a hurry. This can be especially helpful if they need to cover an unexpected expense or make a large purchase.
Furthermore, a personal loan can help consolidate debt. By consolidating debt, individuals can lower their monthly payments and save money in the long run.
Nowadays, it is also easy to get the best personal loan in India. You can easily apply online for the loan, and it will get approved quickly.
Additionally, it also provides tax benefits.
What are the tax benefits on a personal loan?
When it comes to taxation, few benefits are associated with a personal loan. Let’s take a look at them:
1. Loan amount used for business purpose
Individuals can claim a deduction under the Income Tax Act if the personal loan amount is used for business purposes.
The interest paid on the loan amount can be claimed as an expense, which will reduce the net taxable profits of the business, thus reducing the tax liability.
Additionally, as per the Income Tax Act, there is no maximum limit up to which individuals can claim the interest paid as an expense.
Thus, individuals can even claim the entire interest paid as an expense.
2. Loan amount used for buying/construction of a residential house
If individuals use the personal loan amount for construction, renovation, and residential home purchase, they can claim a tax benefit.
Individuals can deduct the interest paid on the personal loan from the total income u/s 24(b).
If individuals reside in the house(self-occupied), they will get a deduction of up to Rs. 2 lakhs. On the contrary, there is no limit if the house is rented.
3. Loan amount used for educational purposes:
If The interest paid on a personal loan for education used to finance higher education can be deducted under Section 80E.
The deduction can only be availed if the personal loan is taken for the higher education of themselves, their spouse, children and to whom they are a legal guardian.
The entire interest amount can also be claimed as a deduction as there is no limit on the amount that can be availed as a deduction.
4. Loan amount used for the purchase of another asset
Suppose the personal loan amount is used to purchase another asset such as jewellery, shares, and non-residential house, in that case, the interest paid on such an amount will be added to the cost of the acquisition of the asset.
The tax benefit can be claimed when the asset is sold.
When the asset is sold, the acquisition cost is higher, thus reducing the capital gains (i.e., Selling price – Cost of acquisition).
So, the lesser the capital gains, the lower will be the tax.
Other essential points regarding the tax benefit of a personal loan
- The personal loan an individual takes is not an income, but a loan, thus it is not considered a taxable income.
Thus, individuals don’t have to pay taxes on the amount borrowed.
- Individuals are required to provide a piece of evidence indicating that they used the loan amount for the specified purpose as needed to get the tax benefits.
- To avail of tax benefits, individuals are advised to keep a copy of all the necessary documents.
Unlike a loan secured against property or gold, a personal loan is unsecured.
This means that the lender is taking on more risk when they offer a personal loan, so they might not provide the best interest rate.
Additionally, if individuals can’t make payments on time, it could hurt their credit score.
Thus, it is advised that individuals evaluate their needs and repaying capacity, compare the interest rates and terms offered by different lenders, weigh each option’s pros and cons, and choose a reliable lender.
To get a personal loan, apply online, and the loan will get approved within 10 minutes.