If you want to borrow money to pay for your wedding or a trip you want to go but don’t know how to do it. In such circumstances, you might think about requesting a personal loan. Personal loans are simple to apply for and have simple qualifying requirements. Many consumers are also unaware of personal loans’ extra perks, which is the possibility of tax advantages. Are you considering applying for a personal loan but wondering if the loan would be taxable? Or perhaps you’re making EMI payments and wondering if you qualify for a tax benefit for personal loans. Here is everything you need to know about personal loan tax benefits.
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Introduction
In the current situation, everyone is taking out loans, whether they are doing so for a wedding, a car, a business, or any other reason. You can apply for a personal loan using your salary as collateral or as a pledge of any assets if employed on a salary.
A personal loan can be obtained from a bank, financial organization, or another individual, such as a friend or relative. Suppose the loan is obtained from a bank or other financial institution. In that case, the income tax authorities can easily trace it, which is not counted toward the borrower’s taxable income.
On the other hand, if a loan is obtained from a known party, the assessee must be careful to ensure that the transaction (Receipt, Payment) takes place through a banking channel, as the income tax authorities may otherwise count it as taxable income.
In some circumstances, such as when a loan is taken for business reasons, you may be eligible to claim tax benefits on them. In such cases, the interest paid on the loan will be deducted from your taxable business income.
You can learn more about the numerous tax exemptions on personal loans and personal loan tax deductions with this post from our exports. This will enable you to choose more wisely when applying for a personal loan.
What Are The Components Of A Personal Loan Tax Deduction?
If you use the money from your loan to buy, develop, or repair your home, you can deduct the cost from your taxes under Section 24, which deals with homeowner tax deductions. Any interest paid on borrowed funds used to purchase, construct, or renovate your home is deducted from your income or the net annual value of your property.
You can deduct up to Rs 2 lakh from the value of the self-owned property. You are entitled to a tax deduction of up to Rs 30,000 if you utilize the loan to restore or repair your home.
However, you can deduct the entire interest payment if you use a personal loan to pay for a rental residence.
Make sure you save all required supporting documentation for your records. You will need to show a signed certificate from your bank attesting to the fact that the personal loan was used to purchase your home.
How To Avail Tax Benefits For A Personal Loan?
Business Purposes
Since personal loans are typically approved considerably more quickly, and with less difficulty than company loans, many entrepreneurs, startup owners, and small business owners prefer applying for personal loans instead of business loans. If you take out a personal loan to cover company expenses, the interest you accrue on the principal amount of the loan is also considered a business expense. This is subtracted from the company’s net profit, which results in a smaller taxable income and, thus, a lesser tax burden on the business owner.
Education costs
If you take a personal loan to pay for higher education, you may be able to deduct that amount from your taxes under Section 80E of the Income Tax Act. There is no cap on the amount of interest that can be removed; however, this advantage only applies to loan interest payments, not principal payments. Tax deductions of up to 1.5 lakhs are already available under Section 80E for costs associated with your own, your spouse’s, or your kids’ education. In addition, if you are a student’s legal guardian and have taken out a loan in their name to assist pay for their education, you are also eligible to claim deductions.
Home improvement
If borrowers utilize their loan funds towards acquiring or building a residential property, they may qualify for tax benefits. By Section 24 of the Income Tax Act of 1961, the borrower may receive tax benefits for paying back interest on the loan. The most that can be claimed as a tax deduction for a home the borrower resides in is Rs. 2,000,000. If the house has been rented out to another person, there is no upper limit on the amount that may be claimed. To receive tax benefits, the borrower must be the property’s owner.
Purchasing an asset
The fourth and last situation in which one may qualify for tax deductions under the personal loan program is when the borrowed funds are used to invest in assets such as jewellery, non-residential real estate, stocks, shares, and more. The acquisition cost would be increased, but the borrower would not be able to claim the deduction in the same year the interest is paid. When they sell the asset, the borrower may claim the tax benefit.
Things To Consider While Availing Tax Benefit On Personal Loan
A personal loan is not considered income. As a result, the loan amount will not be regarded as taxable income. Therefore, if you take out a personal loan, you won’t have to pay any taxes. This situation, however, is only applicable if your loan source is legitimate and trustworthy.
You may be able to claim tax benefits for personal loans, but the income tax division will need sufficient evidence to consider your application. Ensure that you have on hand before applying for a personal loan all the necessary paperwork. You can avoid any future annoyances by doing this.
Tax Exemption On Personal Loan Details
| End Use of Personal Loan | Tax treatment of interest | Implications for the borrower | Exemption Limit |
| For business | Allowable as an expense from the profit of the borrower’s business before calculating tax | Tax liability reduced as per applicable marginal tax rate | No limit |
| For the construction of a residential property | Allowed as a deduction from Annual Net Value (Net Income) of the residential property | Tax liability reduced as per applicable marginal tax rate | Up to 2,00,000 |
| For purchase of any other asset | Not allowable in the year in which interest is paid. Interest expense gets added to the cost of acquisition of the asset at the time of sale of an asset, thus reducing capital gains | Tax liability is concentrated in the year of the sale, or purchase as per applicable capital gains tax rate (short-term or long term) | No limit |
There are numerous other income-producing assets besides residential real estate that you might choose to invest in, such stocks or gold. There are ways to take advantage of personal loan tax benefits if you borrow money to invest in these assets. However, you won’t be able to deduct the interest payment from your taxes immediately. Instead, the acquisition cost is increased by the interest you pay on the loan you use to purchase the asset. The interest amount included in your acquisition cost lowers your capital gains when you sell this asset, which lowers your obligation to pay capital gains tax on the sale transaction. Purchasing additional assets.
What Are The Documents Required For Personal Loan Tax Exemption?
- Sanction Letter
- Expense Vouchers
- Auditor’s Report
- Bank Certificate
A personal loan is the best option for funding during emergencies because it can be used for a variety of purposes and is promptly available. A Loaney Personal Loan application is simple to complete from the convenience of your home. One of the main benefits of getting a Loaney personal loan is the competitive interest rate. Other benefits include immediate approval and quick loan disbursal. Additionally, you may quickly check the status of your Loaney Personal loan online.
Conclusion
Although personal loans are not taxable, they may be tax-exempt. However, that depends on the purpose of the personal loan. There are three circumstances in which it is possible to claim tax benefits for personal loans, as was already mentioned. As a result, you can maximize these deductions as a borrower.
Visit the Loaney website or download the app to apply now if you’re seeking a personal loan that requires little documentation and is disbursed within 24 hours of application approval.
Frequently Asked Questions
- How to show a personal loan on a tax return?
Personal loans are typically not taxed since they are regarded as non-cash expenses. As a result, you won’t have to include this sum in your taxable income when you file your income tax returns.
- How do loans avoid taxes?
Since a loan is not considered regular income, you receive it tax-free. However, the loan’s interest cannot be written off because it is taxable.
- Is there a personal loan tax benefit?
A personal loan is a kind of unsecured loan given to people by banks or other financial institutions. Personal loans cannot be viewed as taxes because they are not regarded as such. They offer tax advantages when these loans are utilized to start a business, buy a home, or make other specific purchases.
- Is interest on a personal loan tax deductible?
In most circumstances, personal loans’ interest cannot be deducted from taxes. Unless the loan is used for eligible taxable investments, qualified business expenses, or qualified educational expenses, you cannot remove interest costs from an unsecured personal loan.
- What kind of personal expenses is tax deductible?
Mortgage payments, student loan interest, charitable contributions, medical costs, 401(k) and IRA contributions, and some education costs, are among the top personal expenses for individuals that continue to be deducted from taxes. You can only take most of these if you file an itemized tax return.
- What interest is tax deductible?
The following loans, according to the IRS, have interest that is tax deductible:
- Interest on home loans
- Interest on outstanding student loans
- Investment interest expenses
- Interest on business loans