Tax Benefits of Personal Loan allowed in 3 Cases


Personal loan is one that Money or funds that fulfill someone’s personal financial requirements. Personal loans have a higher interest rate than other loans and are typically for a shorter period of time. A personal loan has far fewer eligibility requirements and is thus a lot easier to apply for. In many ways, it’s an instant personal loan to take care of your short term personal needs.

Many people are unaware that personal loans have an additional benefit in that they can be used to obtain tax benefits. The Indian government provides tax incentives for loan repayment. Let’s take a look at the tax advantages of taking out a personal loan.

Tax Benefits of Personal Loan allowed in 3 Cases in India

The Indian Income Tax act mentions no specific tax benefits for personal loans However, this does not rule out the possibility of obtaining tax benefits.

Since the Indian Income Tax Act makes no specific reference to tax deductions for personal loans, the purpose for which the personal loan was taken out would be taken into account when granting tax deductions for a personal loan. In the case of a personal loan, tax benefits are available only if the loan was taken for one of the three causes that qualifies for an income tax deduction.

Business purposes

If the funds from a personal loan was used to start a business, the interest paid might be deducted as a business expenditure. As a result, the business’s net taxable profits will be reduced, lowering the tax liability. In this scenario, there is no upper limit on the amount that can be claimed as an expense.

Real estate

If a personal loan is used for the acquisition or development of a residential property, the borrower may be eligible for tax benefits. Section 24 of the Income Tax Act of 1961 allows the borrower to claim tax benefits for interest repayment.

In this situation-

The highest amount that may be deducted as a tax deduction for a house occupied by the borrower is Rs. 2 Lakhs.

If the residence has been rented out to someone else, there is no limit on the amount that can be claimed.

In order to qualify for tax benefits, the borrower must be the owner of the property.

Purchase of assets

In circumstances where the loan amount has been invested for the purchase of assets such as precious ornaments such as gold, non-residential property, shares,stocks, and more, tax deductions are available under personal loans.

The deduction cannot be claimed in the same year that the interest is paid, but it can be added to the cost of acquisition.

The tax benefit can be claimed by the borrower in the year in which the asset is sold.

Things to Remember

The tax deduction will only apply to the interest portion of the loan, not the principal. If the personal loan was taken out for any reason other than those listed above, no tax benefits will be given on the loan.

Since the money raised through a personal loan is not considered income, but rather a loan, the beneficiary will not be subject to taxation.

To be qualified for a deduction, there must be adequate documentation that the funds raised through a  personal loan were used for the stated purpose as outlined above.

Ensure you have a copy of all relevant paperwork, including all the loan-related papers, and all other applicable documents, in order to claim Income Tax Benefits for a  personal loan.

By law, a  personal loan is not eligible for a specific deduction in India. In order to qualify for a  personal loan deduction, the purpose for which the loan was taken out must be considered. If the  personal loan was obtained for a purpose that qualifies for an income tax deduction, the deduction for the  personal loan would be allowed; otherwise, it would not.

Keeping the same in mind, if you wish to apply for a  personal loan, head to Finserv MARKETS and benefit from flexible repayment tenure, pocket friendly interest rates, minimal fee for loan foreclosure and much more!

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