Snneha Lukaa
April 22, 2020 0 Comment

It is a common notion among tax payers in India that only an education or home loan can provide tax benefits. However, in reality, one can also avail tax benefit on personal loan as well.  Since tax payers in India are largely unaware of how personal loans can offer tax benefits, here’s a short guide that helps you understand how you can do so. 

Availing a personal loan is one of the best ways to address emergency financial situations. Whether you need money to fund your child’s education or tackle a medical emergency or even handle your wedding expenses, a personal loan can be availed to address any kind of personal requirements. Since this type of loan is unsecured in nature, lenders do not require you to provide any collateral or guarantor. Today, availing this type of loan has become easy as it requires you to submit minimal documents and also has a simple eligibility criterion. In addition to this, since this type of loan is available instantly at affordable interest rates, borrowers in India usually opt for this loan as it can be used for any purpose.

Is personal loan taxable?

Generally, personal loan is not taxable as it is not considered a part of your income. But depending on the end use of the loan amount, you can claim for tax deduction on personal loan. This can be done only if you utilize the personal loan amount for educational, house renovation, business or any other purpose that allows for tax deduction under the Indian Income Tax Act, 1961.  It is important to note that tax deduction can be claimed only on the interest amount paid and not on the principal amount. 

Three scenarios under which you can claim tax benefit on personal loan

 Investing in property

If you avail personal loan for buying or constructing a residential property, then as per section 24 of the Income Tax Act, you can avail tax benefit on the interest paid. You can avail tax benefit up to Rs. 2 lakh for buying or renovating your self-owned house and in case of personal loan availed for a rented property, there is no limit on the maximum amount up to which you can claim tax deduction. However, to avail tax benefit in such case, it is imperative that you keep a record of all the documents to avail tax benefit at the time of filing income tax.

Investing in business

Tax deduction can be claimed if the personal loan amount is utilized for investing in a business. In this case, there is no capping on the maximum amount that you can claim deduction on.

Investing in assets

The third scenario under which one can avail tax deduction is investing the personal loan amount in the share market, non-residential property or purchasing jewellery. The borrower can not claim tax deduction in the same year in which the interest is paid, but can do so at the time of selling the asset. 

Since personal loans can be used as an effective-tax saving tool, its is imperative that you plan your finances wisely to save more on taxes.

Disclaimer: Please speak to your CA for tax advice. Credit Fair won’t be responsible.