Personal loans are one of the most comfortable finance options for consumers and the demand for such loans is on the rise. Although they have higher interest rates than other loan types, many prefer personal loans for their hassle-free approval, minimal documentation, less tenure, and so on. If the repayment phase is planned correctly, a personal loan can be beneficial and can also improve the credit score in some instances. The loans can be used to meet immediate financial requirements like a vacation, marriage and other miscellaneous expenses. Many borrowers believe that one cannot avail tax benefits, but interestingly, there are few ways by which you can avail them.
Below are three such scenarios:
For purchasing/renovating/construction of homes:
If you are considering buying or constructing a property, you can have the interest paid claimed as an exemption. Such an arrangement is applicable as per section 24 of the Income Tax Act. In case, you have received an instant personal loan to renovate/purchase a building; you would be entitled to deduction as per section 24(b).
Assume that you have a self-owned house; you are eligible for a deduction of up to Rs. 2 lakhs. For a rented house, the total interest accrued count for personal loans tax benefits.
For investing in a company
If the intent of the amount borrowed on quick personal loans is for the investment in the borrower’s company, then the interest on the loan may be reported as a tax-deductible expense. Interest paid can be excluded from income before determining the tax liability, thus reducing the company’s net taxable profit and, therefore, lowering the tax liability. There is no maximum permissible limit for the amount of interest that could be reported as a tax-deductible cost.
Personal loan for the purchase of assets:
If the personal loan taken is for the purchase of assets such as jewellery, shares, etc., then the amount paid on such borrowing would be added to the cost of the asset acquisition.
Deduction for this will not be permitted automatically in the year in which the interest was charged, but that would be added to the acquisition cost, and tax benefits would be permitted in the year in which such an asset will be sold. Such an instance will increase the acquisition cost and reduce the in-turn capital gains that would result from the sale of such an asset.
In the above situations, the interest portion of the personal loan would be allowed to commit. The deduction would not be permitted to repay the principal component but would only be allowed to repay the interest component.
If the amount raised by a personal loan were used for any other purpose, then no income tax benefit would be permitted for the same purpose.
Things to consider while availing tax benefit on a personal loan:
Personal loans do not form a part of income. So the amount of the loan will not be considered as a taxable fund. Therefore, if you happen to use a personal loan, you won’t have to pay any taxes. This case is only valid if the source of your loan is authentic and reliable
You can claim tax benefits on a personal loan, but you’ll need to give the income tax department ample evidence to support your claim. Make sure you keep all the necessary documentation readily available in advance. That will enable you in the later stage to prevent any inconvenience
Conclusion:
Because a personal loan is a multipurpose loan and can be used immediately, it is an ideal source of financing in the event of emergencies. To benefit from tax benefits, you would need to know your personal loan eligibility, plan your finances accordingly and go for the right type of finance modes.