A personal loan comes as a convenient financial tool that can be used for a variety of purposes. Whether dealing with a medical emergency, sponsoring the foreign trip, or funding expenses of your marriage, a personal loan can be taken to succour your situation. As the category of unsecured loan, it explains that there is no additional requirement of collateral in a personal loan. Hence, to claim all the benefits under tax deductions in a personal loan, the purpose of availing a personal loan becomes extremely vital. The Indian Income Tax Act does allow tax deductions on loans depending upon specific goals of how a loan amount is being used. Click here to check more details regarding availing an instant personal loan.
Claim tax benefits on personal loans through these purposes
Personal loan for home renovation: Under section 80C of Income Act, an individual can claim a tax deduction of a maximum amount of Rs. 1,50,000. When you are availing a home loan for renovation, the principal amount you have borrowed qualifies the category for a tax deduction. But property should be in possession for a minimum of 5 years. Any transfer before this period shall make all the amounts claimed as deductions taxable.
Personal loan for business purpose: When you take a personal loan and invest it for a business purpose, the interest paid on it will be allowed to claim as an expense. The net taxable profits will also be reduced, ultimately leading to a decrease in tax liability. There is no maximum threshold for the amount that can be declared as expense in such a case.
Personal loan for construction/purchase of a property: Apart from home renovation if a personal loan is taken for the purpose of purchase or construction of residential property then the interest paid is exempted from taxable income under Section 24 of the Income Tax Act. If the property is self-occupied, the upper limit of claim amount can be somewhere around Rs. 2,00,000. However, if the property is given on rent or let-out, there is no upper limit and can be charged as deemed fit.
Personal loan for investing in other assets: As we have seen in the prior cases where the deductions were allowed immediately, but when it comes to purchasing any assets like jewelry, shares, non-residential house, etc. the deductions won’t start instantly on the interest rate in the current year and would be summed up in the cost of acquisition. Later, when the asset is sold out, the tax benefits will be provided that year. This reduces the capital gains on the asset, which would arise during the sale and automatically, the cost of acquisition is increased.
Some other aspects of tax benefits on a personal loan
Apart from the criteria mentioned above, here are some other important aspects that should be kept in the mind of a borrower when he wishes to avail of the tax benefits on a personal loan.
- The borrower should provide proper evidence in the context of the amount raised through a personal loan used for a specific purpose which comes under the category of tax deduction
- When a borrower prefers to claim the benefits of tax deductions, he should be ready to provide the softcopy of essential documents like loan amount sanctioned, interest rate, tenure of the loan amount, and other related details
- When an amount gets sanctioned through a personal loan, the loan amount received in hand is not taxable as it is not an income but a loan
Now by procuring a personal loan, a taxpayer can reap some tax benefits from a personal loan. Certain financial institutions provide a personal loan that can be used for an array of purposes according to the requirement of the loan borrower.