TOP 4 TAX BENEFITS OF PERSONAL LOANS?
There are a few aspects of personal loans that we all are aware of. They are currently available, versatile, and simple to use. Personal loans, like home loans and business loans, allow you to receive some tax benefits while making your payments.
Are Personal Loans Taxable?
The loan amount you get from a personal loan cannot be regarded as part of your income because personal loans are non-taxable loans. However, there are specific situations when the Income Tax Act provides large tax savings on the interest paid on personal loans for salaried workers and businessmen. Both the loan’s origin and its intended use are taken into account in this.
Tax Benefits of Personal Loans:
Personal Loans for Home Construction & Renovation – if you avail of a personal loan for home improvement, purchase, or renovation, the interest amount is tax deductible. If you own the property and live in the house, you are eligible for up to ₹ 2 lakh from the interest paid towards your loan. The total interest paid on the loan can be deducted from your taxable income if it is a rented house.
Personal Loan for Self-Employed – If you run your own business, you fall under self-employed individuals. Personal loans for self-employed professionals are also eligible for tax exemptions. The interest paid on the personal loan for business is deducted from your business’s gross income, and taxes are imposed on the remaining amount. This way, the interest paid on your loan reduces your total tax liability.
Personal Loan for the Purchase of an Asset – A personal loan for the purchase of an asset such as gold, bonds, shares, etc., can also offer some tax benefits on personal loan interest. However, in the year of the purchase, you cannot avail yourself of any tax benefits. In the year of selling the asset, you can add the interest amount to the acquisition cost and get tax benefits on this purchase. The interest paid on the personal loan is reduced from capital gains earned from the asset’s sale, and the tax is calculated on the remaining amount. Thereby reducing your tax liability.
Personal Loan Tax Exemptions – Under some circumstances, there are personal loan tax exemptions for salaried people and people in business. The effect of personal loans on your tax liability is lesser than that of taking a home loan or student loan. But, keeping yourself aware can help you get substantial tax benefits even through a personal loan. Here’s a look at the summary of personal loan tax exemptions –
End Use of Loan Amount | Tax treatment of Interest Expenses | Implications for the Borrower | Exemption Limit |
For Business | The interest expense is deducted from the business profits before calculating the tax | Tax liability gets reduced as per applicable marginal tax rates | No limit |
For the Construction / Renovation of a Residential Property | Allowed as a deduction from the Annual Net Value of the residential property. | Tax liability is reduced as per the applicable marginal tax rate | Up to ₹2,00,000 |
For the Purchase of Any Other Asset | Not allowed in the year of the purchase. Interest expenses are added to the acquisition cost when selling the asset. Thus, reducing capital gains. | Tax liability is reduced in the year of asset sale as per the applicable rate of capital gains tax. (Short term or long-term) | No Limit |
A personal loan might help you get the money you need right now. Some people use personal loans to pay off existing debt, while others use them to fund major purchases like weddings, trips abroad, or large purchases. Personal loans, despite having high-interest rates, can support you in trying times by allowing you to repair your home or pay off debt.
Even though there are fewer tax advantages associated with personal loans than with home loans or student loans, a little bit of knowledge can go a long way. Under the three conditions outlined above, the interest paid on the personal loan may lower your taxable income or be counted as an expense for tax deductions.
