Taking out a personal loan is an easy option to secure quick money for all your financial demands. A loan for personal use will cover all of your needs, whether you need to pay for medical expenses, fund travel, organize a wedding, or support your child’s education.
Another benefit of these flexible loans that can be paid out quickly is that you may be able to get a tax break for them.
Although the Income Tax Act doesn’t make any particular provisions for these loans, you can deduct your loan payments from your taxes if you use the money for the following:
- Purchasing a business
- acquiring, constructing, or remodeling a residence
- Purchasing assets
Let’s examine how to claim tax deductions in these three scenarios. But first, let’s work on the basics.
What is a Personal Loan?
A personal loan is a type of loan that provides financing for a person’s individual financial needs, such as funding for a wedding or a trip. Personal loans typically have a shorter term and a higher interest rate than other types of borrowing. However, a personal loan has considerably more lenient requirements and is much simpler to apply for. Many people might not be aware of the additional benefit of personal loans, which is the possibility of receiving tax advantages. The Indian government offers tax breaks for loan repayment. Let’s learn more about the tax advantages associated with personal loans.
Tax Deductions for Personal Loans
The Indian Income Tax Act makes no mention of any particular tax deductions for personal loans, but there are tax deductions for other normal loans like home loans and education loans. However, this does not imply that borrowers of personal loans cannot receive tax benefits. The purpose for which the personal loan was obtained will be considered to qualify for tax deductions for a personal loan since there is no specific mention of tax deductions for personal loans in the Indian Income Tax Act. In the case of a personal loan, tax breaks are only possible if the loan was taken out for a reason that qualifies for a tax deduction.
Property Purchase Investment
A borrower might qualify for tax advantages if they used personal loan funds to purchase or construct a residential property. According to Section 24 of the Income Tax Act of 1961, you may be eligible for tax breaks for repaying loan interest. The maximum amount that can be deducted from taxes for a house the borrower lives in is Rs. 2,000,000. No maximum amount may be claimed if the home has been rented out to another person. You must be the owner of the property to enjoy tax advantages.
The interest paid on a personal loan used for business purposes may be deducted from income. As a result, both the borrower’s tax obligation and the invested capital company’s net taxable earnings will decrease. The sum that may be claimed in this instance has no upper limit.
Under Section 80E of the Income Tax Act, you might be entitled to deduct the cost of a personal loan you accept to fund your education. The interest amount that can be written off has no limit, but this benefit only applies to interest payments made on loans, not principal. Section 80E of the tax code already allows for up to Rs. 1.5 lakhs in tax deductions for expenses related to your own, your spouse’s, or your children’s education. You can also claim deductions if you are the legal guardian of a student and borrowed money in their name to help pay for school.
Quick Points to Note
- Deductions for loan interest repayment are allowed under Section 24 and Section 80EE. However, you may deduct payments made for the principal balance of your mortgage under Section 80C. There is an Rs. 1.5 lakh exemption cap under Section 80C.
- The mortgage has been used to build or purchase new real estate.
- The house hasn’t been sold in the five years since it was bought.
- The taxpayer will be required to pay back the exemptions claimed on the mortgage in the year the property was sold if it is sold within five years.
- Any amount paid in interest can be deducted if you have taken out a student loan.
- The loan must be taken out in the taxpayer’s name to pay for either the taxpayer’s own higher education or the higher education of a relative.
- Only eight years are allowed for deduction claims.
- On house loans obtained for a property on which you are currently residing, Section 24 is applicable. The deduction is available when loan interest is repaid, and the exemption amount is limited to Rs. 2 lacs.
Additionally, if you take out a personal loan for commercial purposes, you can deduct the interest from your loan repayment. The interest is subtracted from the business’s profits, which lowers the total amount of taxes owed. On the other hand, the interest component of a personal loan can be deducted from the cost of acquiring an asset, such as real estate, jewelry, or stocks, which results in lower capital gains when the item is sold. As a result, your tax liability is reduced.
Likewise, you will not be eligible for any tax advantages if you use the loan amount for anything other than these four uses. However, if you are qualified for these tax breaks, take advantage of them to avoid paying taxes on your hard-earned money.
Have the advantages persuaded you to take out a loan for your own use? If so, Piramal Finance can provide you with all the necessary knowledge. Find out more about the requirements for your personal loans.