How to get Tax Benefits When You Take Personal Loan?

A personal loan is a great way in bridging your short-term funding requirements, but it can also get you some tax benefits, depending upon the purpose for which you have used the loan. Also, since a personal loan can be used for different requirements not restricted to any specific end-use, make sure that you maintain proper documentation proof of the loan utilisation to avail the tax benefit. Let us discuss how to get tax benefits when you take personal loan:

1. Personal Loan for Funding Purchase/ Construction of Residential Property

tax benefit on personal loan

If you utilise the personal loan amount towards purchase or construction of a residential house property, you can avail tax deduction under Section 24 of the Income Tax Act. As per this, the interest on such a loan can be claimed as deductible from the gross total income of the taxpayer as per the specified limits.

If the residential house property is self-occupied (i.e. you are using the house property for own use), you can claim interest deduction of up to Rs. 2 lakh every year. In case you have rented that house, the total deduction available to you is Rs. 2 lakh (net of any taxable rental income). Let us understand this deduction with the help of an example.

Suppose you have rented the house for Rs. 10,000 per month. The total annual rental income for you is Rs. 1.20 lakh. As per the prevailing Income Tax laws, a 30% standard deduction is given towards rental income towards repair and maintenance of the property. Hence, the taxable rental income for the year would be 70% of the rental income received. In the above case, the taxable income will be Rs. 84,000. Accordingly, you can claim a deduction of up to Rs. 2,84,000 in respect of the interest, as the effective interest deduction will be Rs. 2,00,000, net of Rs. 84,000 taxable rental income.

Particulars Amount
Monthly Rental Income (assumed) Rs. 10,000
Annual Rent Rs. 1,20,000
30% standard deduction allowed under Income Tax towards repair and maintenance Rs. 36,000
Net Taxable Rental Income Rs. 84,000
Ceiling Limit for Loss from House Property Rs. 2,00,000
Total Interest Expense that can be claimed Rs. 2,84,000 (Rs. 84,000 + Rs. 2,00,000)

To claim this deduction, you will require a certificate from the bank evidencing the interest debited to the loan and further, sufficient documentation that the proceeds of the personal loan were used towards such residential house property. This deduction results in the reduction of the tax liability as per the tax rates applicable to the individual.

Further, if you have utilised the loan for residential house property, you can also avail deduction under Section 80C of the Income Tax Act with respect to the principal repayment of such loan. As such, while the disbursement of such personal loan is not considered as an income when received in bank account, you can still avail tax deduction towards repayment of such loan in the year when you repay the principal amount.

However, one must note that this deduction towards repayment of the principal amount is amongst the basket of tax saving options under Section 80C including payment of life insurance premium, contribution towards provident fund, tax-saving fixed deposits, mutual funds, etc. The ceiling limit for deduction under Section 80C is Rs. 1.50 lakhs. Thus, you can save tax on income up to Rs. 1.50 lakh for all the tax-eligible payments taken together.

2. Personal Loan for Business Use

income tax benefits on personal loan

If you have used the proceeds of the personal loan for funding your business requirements, the interest on such loan can be claimed as a business expense. In simple words, it means that the taxpayer can reduce the total income by such interest expense to calculate the actual taxable income.

Such interest expense will be available to the individual on an accrual basis, i.e. as and when the liability of the interest has accrued and not on actual payment basis. Usually, banks debit the loan account on the last day of the month. So, one can claim the interest expense debited for the year as deductible. There is no ceiling on the interest expense so claimed as tax-deductible, hence, the tax liability will be reduced for the entire interest expense debited as per the tax rates applicable to the individual.

3. Personal Loan for Purchasing an Asset


tax benefits on personal loan

If you have utilised the personal loan towards purchasing an asset like jewellery, commercial property, shares, bonds, etc., such interest expense can be added to the cost of the assets. When one calculates the capital gain from such asset on the actual sale, the cost of acquisition, including the interest expense can be deducted from the sale proceeds.

Hence, the benefit of this interest expense will be available to the individual when such asset is sold. Accordingly, your tax liability will be reduced in the year of the sale of such asset as per capital gains tax rate as applicable. When the capital asset has been held for more than specified period and the capital gain is considered as long term capital gain, one can even avail the benefit of indexation on such interest expense, and hence, even a higher benefit may be allowed as against the actual interest expense.

However, one must take note of the tax laws that sale of personal effects, etc. is not subject to capital gains and accordingly, no benefit of interest expense is available if the personal loan has been utilised towards personal effects, such as furniture, car for personal use, etc.

Thus, you can get income tax benefits when you take personal loan, if the loan is utilised for specified purposes as discussed above. Make sure you preserve the necessary documentation to demonstrate such utilisation. Money View Loans provides you instant, collateral-free loans. If you are looking for some quick funds for any purpose, including the purposes as discussed above, try Money View Loans.

Disclaimer: The information provided in this article is for informational purposes only. You may consider consulting tax professionals for specific guidance for the applicable Income Tax rules for you, as tax benefits are subject to changes due to change in tax laws. The tax laws as discussed above are updated till Finance (No. 2) Act, 2019, i.e. Union Budget 2019.