Personal loan interest rate is tax deductable or not?

Personal loans are unsecured loans that are great when you need money but don’t have anything to put up as collateral. These loans are often not taxed since they are not considered part of your income when completing your IT reports.

However, the loan must come from a legitimate source, such as a bank or other money firm, as loans from unknown sources may be taxed as income.

As a result, you may claim an income tax deduction. There are, however, certain limits tied to it.

People considering a loan may question whether such loans are tax deductible. In a nutshell, the answer is yes! Many consumers are unaware they might get tax perks on personal loans and lose out on refunds. The final use of the loan amount will determine whether or not you get a personal loan tax benefit.

Is Personal Loan Tax Deductible?

No, in most cases, but there are a few exceptions. Personal loans may be tax-exempt if the revenues are used for firm costs, qualifying education costs, or eligible taxable assets. A personal loan will not impact your taxes if you do not use it for one of these reasons.

A personal loan may help you save money by consolidating high-rate debt or offering the cash you need to cover an urgent or surprise cost. While there are exceptions, personal loans do not affect your taxes. This is why:

1. It is not earnings

The money you get from a personal loan is not added to your taxable income, so you don’t have to pay taxes.

2. It is just for personal use

Loans are often used for personal purposes, and personal costs are typically not deductible.

3. Even when it is permitted, only interest is tax deductible

Certain forms of loans may be eligible for a personal loan tax deduction. Yet, you may deduct only the interest portion of the loan, not the whole amount.

Is Personal Loan Interest Tax Deductible?

The amount given back to the lender in interest is tax-deductible and can be written off as payments for work costs. Firm costs are costs incurred to create income from a firm and may be subtracted from total revenue to determine the taxable amount. 

In short, a user may deduct the rate from firm costs to know the taxable amount. It is an excellent tool for small firm owners and startups to reduce their tax obligation and use the profits to develop their operations.

Yet, the principal amount borrowed from the lender is not tax-deductible and cannot be claimed as a business expense. The whole amount taken as a firm loan is the principal amount, and no tax is due on the main amount. It is a component of the total salary, and the firm owner pays tax on the net income received.

Personal Loan Tax Benefit

The Indian Income Tax Act does not mention any special personal loan deduction, but there are tax breaks for other regular loans such as education, home, etc. Yet, this does not rule out the possibility of obtaining tax savings via a personal loan. As there is no mention of a personal loan deduction in the Indian Income Tax Act, the reason the loan was obtained will be taken into account when granting tax deductions for a loan. In the case of a bank loan, tax benefits are available only if the loan was taken for a purpose that qualifies for an income tax deduction.

The following situations will qualify for a personal loan tax deduction:

• For Commercial Purposes

If a person uses a personal cash loan to invest in his/her firm, the rate on the loan becomes a liability for the firm. In this case, the rate paid is an expense that can be deducted from the firm’s net profit. This lowers the amount subject to net tax profit. Besides, no limit has been set by the Income Tax Act on the amount of a firm’s tax-deductible liabilities. The person’s interest is tax deductible if the loan is used for business purposes.

• For the Purchase or Building of a Home 

Section 24 of the Income Tax Act, titled “Deductions from Income from House Property,” allows for tax breaks. Section 24 mentions that the rate paid on funds obtained through a bank loan can be deducted from net taxable income from residential property. Section 24 will apply if the funds are used to buy or build the same property.

• Education Costs 

If you use a personal loan to fund your higher education, you can claim tax breaks under Section 80E of the Income Tax Act. This perk only applies to loan interest payments, not principal, but there is no upper limit on the amount of the rate that can be claimed as deductible. Section 80E currently allows for a personal loan tax deduction of up to Rs. 1.5 lakhs for education-related costs incurred by you, your spouse, or your children. And you may also claim savings if you are a student’s legal parent and have taken out a loan in their name to assist in funding their education.

• To Purchase Assets

Assume the loaned money is used to purchase jewellery, stocks, or other non-residential assets. In such instances, the user cannot claim immediate tax relief when acquiring the assets. The rate paid on lent money used to purchase the item, on the other hand, is added to the overall cost of obtaining that asset. As a result, if the debtor sells an asset, the paid rate is subtracted from the capital gains. It is reduced as part of the buying price. This lowers the taxable profit.

Conclusion

Even though the Income Tax Act does not explicitly state a personal loan tax deduction, you may profit from them. The main factor when providing tax deductions on personal loans is the reason you obtained the loan, never the original amount. Finally, you may claim tax deductions if you use the personal loan balance for tax-favourable reasons. Before deciding on a loan, be sure you understand all of the details.

To learn more about the personal loan tax deduction, visit Piramal Finance for related blogs and explore their products and services.