Tax Benefit on Personal Loan

Are you planning to apply for a personal loan to meet an urgent financial need but not sure about its tax implications? Or are you repaying the installments of a previously availed personal loan and was wondering if you could avail of a tax benefit on it? Here’s all that you should know about the tax benefits on your personal loans.

Is the Personal Loan Amount Taxable?

If you have availed your personal loan from any valid source like a recognized bank or financial institution, you would be relieved to learn that the loan is not taxable. The primary reason for this is that the loan amount is not considered as an income for you.

Tax Benefits for Interest Paid on Personal Loans

The interest paid on the loan is tax-deductible depending on the purpose for which the personal loan was availed. In particular, there are 3 specific cases where the borrower can avail of tax benefits. This reduces their tax liability and therefore, the net taxable amount for the fiscal year.

The 3 Cases are Explained Below.

  1. Tax Benefits on Personal Loan to Purchase or Construct Residential Properties

    If you have availed a personal loan to construct your own house, then the interest paid on the loan amount can be claimed as an expense on which you can seek exemption from the taxable income. This is as per Section 24 of the Income Tax Act. The same section applies even if you have availed the loan to renovate your house. You should bear in mind that to avail the tax benefits, you should be the owner of the property.

    In case the owner of the family lives in the property, an amount deduction of up to Rs.2 lakh can be claimed. Even if the house is vacant, this amount can still be claimed. And if the property has been rented out, the entire interest amount is allowed for deduction.

  2. Tax Benefits on Personal Loan to Invest in Business

    If the reason for applying for the loan was to arrange capital for your business, the interest payable on the amount can be claimed for tax benefits. This way, the total taxable income from your business would be cut down. Also, note that the total amount that can be claimed here is uncapped.

  3. Tax Benefits on Personal Loan As an Investment in Assets Other than a House

    For personal loans availed for the purchase of assets like non-residential properties, jewelry, shares, etc, tax deduction benefit can be claimed. Although it cannot be claimed in the same year during which the interest is paid, the amount can be added to the total acquisition cost and the benefits can be availed in the year in which the borrower sells the asset.