If you’ve taken a personal loan or are considering applying for one, there’s one benefit you may not have heard about – tax rebates. Yes, you can get a variety of tax exemptions on personal loans in India. Whether or not you are eligible for a tax break depends on the purpose of the loan.
To enjoy personal loan tax benefits, the funds should be used for:
- Business Purposes – Many entrepreneurs, startup owners and small companies prefer applying for personal loans instead of business loans, since they are usually approved much faster and with less hassle. If you use a personal loan to pay for business-related costs, the interest accrued on the loan amount is also treated as a business expense. This is deducted from the net profit earned by the company, which means the taxable income is lower and hence, so is the amount of tax you pay as a business owner.
- Education Costs – You can claim tax deductions under Section 80E of the Income Tax Act if you use a personal loan for funding higher education. This benefit is only applicable on interest payments for the loan, not the principal amount, but there’s no upper limit to the amount of interest that can be claimed as a deductible. Section 80E already offers tax deductions of up to ₹1.5 lakhs for education-related expenses for yourself, your spouse or children. This benefit is over and above that, and you can also claim deductions if you are a student’s legal guardian and have taken a loan in your name to help pay for their studies.
- Home Improvement – Under Section 24 (b) of the Income Tax Act, using a personal loan to make the down payment for a residential property also gives you tax benefits. If the house is under construction, it needs to be ready to move into within 3 years of the loan’s approval, and you can only claim deductions after construction is complete. You also get rebates for home renovations, repairs or construction paid for with a personal loan. If you are residing in the house for which you claim exemptions, the maximum deductible interest is ₹1.5 lakhs. If the house is rented, there is no upper limit to the interest amount you can claim as deductions.
- Purchasing an Asset – If you use a personal loan to buy shares, jewellery, non-residential property or other assets, the interest payable on the loan is added to the asset acquisition cost. Since taxable capital gains are calculated by subtracting the cost of acquisition from the selling price, your tax liability will be lower when you sell this asset.
Remember, using a personal loan for other purposes does not give you the same tax exemptions. Be clear about the reason why you are applying for a loan or personal line of credit and explore all the tax benefits well in advance.
