Tax Benefit on Personal Loan
Are you planning to apply for a personal loan but asking yourself the question - is personal loan taxable? Or are you paying EMIs and wondering if you could avail a tax benefit on personal loans?
Here’s all that you should know about the tax benefits on personal loans.
Is Personal Loan Taxable?
If you have availed your personal loan from a valid source such as 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 on personal loans. This reduces their tax liability and therefore, the net taxable amount for the fiscal year.
The 3 cases are explained below.
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 can be claimed as an expense. You can then seek exemption from this taxable income.
This is as per Section 24 of the Income Tax Act and is applicable even if you have availed the loan to renovate your house. You should bear in mind that to avail the tax benefits on personal loans, you should be the owner of the property.
In case the owner of the family lives in the property, a 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.
Tax Benefits on Personal Loans for Business Investment
If the loan was used to arrange capital for your business, the interest 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.
Tax Benefits on Personal Loan As an Investment in Assets Other than a House
If the personal loan is used for the purchase of assets such as non-residential properties, jewelry, shares, etc, tax benefits can be claimed.
While 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.
While personal loan is not taxable, personal loan tax exemption is definitely possible. However, this depends on what the personal loan is being used for. As mentioned above, there are three scenarios wherein tax benefits on personal loans can be claimed. Therefore, as a borrower, you can make the most of these deductions.