Tax Benefits on Personal Loan

It may be the case that you are dreaming of buying a house or renovating your existing one, or maybe you want to start up a business, and then you realize you have no money to do so. Like any normal person, you will end up going to a bank to take a loan. You realize that you have an option for a personal loan and you take it. Now, do you know that you will get tax benefits on the interests of your loan? Read on:

Even though personal loans can be the solution of many financial related issues as it provides an individual with the money, he needs for a particular reason, yet it poses a major problem as it creates an unnecessary burden over the person’s shoulder with its high rate of interest. One needs to repay the money to their sanctioning loan bank but, of course, with a huge interest levied upon it. But what you may not know is that now you can claim tax benefits on personal loans. Yes, you can. The Income Tax Act or section 24 states that an income tax benefit has been levied on the interests of the personal loan. Though the catch here is that the tax benefits depend on the final use of the money taken as a loan.

The Mechanism of Personal Loans

The government of India deduces tax on personal loans taken for the purchase or repair of residential property, and thus are considered as legal expenses when you claim the same. But you must consider the fact that the principal amount of money is not subjected to tax deductions. You need to submit proofs of the original document to the authorities of the tax department for verification purposes of your action taken with the loan. You need to show the officials that you had used the money for the purchase of residential property or renovation of the same. The tax exemption is done as per the marginal tax rate, and it can be up to 2 lakhs.

Tax exemption is also levied, other than for purchase or renovation of residence, on loan taken for the purchase of any other asset. But it comes with a twist. If a person uses the personal loan for the purchase of assets other than residential property, such as pieces of jewelry, shares, etc., it would not be recognized as an income, and thus the tax liability reduction would not be applicable on the asset purchased. However, tax exemption may be applied to the rate of interest of the loan if the person decides to sell the asset he took a loan for. The rate of interest even that sums up as to become a cost of acquisition, and a tax benefit may be applied to the cost acquisition at the time of the sale of the asset. Tax liability is reduced as per the applicable capital gains tax rate in the year of the sale of the asset. An exception is there in these magical benefits. Tax exemption is not at all allowed on money loaned for business matters or start-up.

Points To Note:

  • The tax deduction does not include the principal amount or the amount you took as a loan. Tax deduction or reduction of the tax liability can only be claimed upon the interests placed on the principal money. As the exemption is only allowed in some particular sphere, you will need to submit adequate proof of your loan spent. You will be eligible for the exemption of liability of tax only if you are deemed right in your actions.
  • To be eligible for the exemption, do keep your receipts and proofs ready. You are needed to keep your bills of payment, sanction letter, expense vouchers, bank certificate, and auditor’s voucher ready to be shown to the officials.
  • Consider and assess your financial circumstances as the rate of interest is quite high the personal loan. You will be paying both the principal and the interest back, so it must be understood that it may become a great strain on your shoulder from a financial point of view.

However, it is advisable to assess one’s financial condition as the personal loan comes with a great drawback. It carries with a huge rate of interest which the person needs to repay, and if one is starting a business, there will be no exempted tax. The rate of interest is somewhat low in-home loans, and if the person thinks that he may not be able to repay the principal and the interest of the loan back, he may opt for home loans for buying or other renovation purposes of residential property. Therefore, you need to choose wisely and if yes, do not forget to keep the receipts!

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