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Personal Loan Tax Benefit

Personal Loan Tax Exemption

Last Updated 22nd Jan 2022

  • You can claim tax benefit on personal loan if the borrowed fund is used for following purposes:
    • For constructing a residential property.
    • For purchasing any other asset.
    • For business purposes.
  • The funds borrowed as personal loan are not considered as income; hence they are not taxable.
  • The exemption limit for construction of residential property is upto ₹ 2 Lakh.
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Tax Rebate on Personal Loan

A personal loan is an unsecured loan that has no end-usage restriction. You can avail of a personal loan for fulfilling various personal or business needs with minimum documentation. While the loan comes with many benefits, the funds borrowed as personal loans are not considered income. Hence, they do not come under the purview of taxation. However, certain circumstances allow you to claim personal loan tax benefits. The loan amount is eligible for deduction from income tax if used for business purposes, residential property construction, or any asset purchase.

How to Claim Tax Benefit on Personal Loans?

Income tax deductions on interest paid on personal loans is allowed, if you have availed the loan for the below mentioned purposes

End Use of Personal Loan Tax treatment of interest expense Implication for the borrower Exemption Limit
For business Allowable as a tax-deductible expense from a profit of the borrower’s business before calculating tax Tax liability reduced as per applicable marginal tax rate No Limit
For construction of residential property Allowed as a deduction from Net Annual 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 asset, thus reducing capital gains Tax liability reduced in the year of sale of asset as per applicable capital gains tax rate (short term or long term) No Limit

Personal Loan For Business Purpose

If the proceeds of a personal loan are proposed to be invested in borrower’s business, the interest paid on loan can be claimed as a tax-deductible expense. Interest paid can be deducted from profit before calculating the tax liability, thus reducing the business’s net taxable profit, thereby reducing the tax liability. There is no prescribed maximum limit for the interest amount, which you can claim for a personal loan rebate in income tax.

Personal Loan For Purchase or Construction of Residential Property

If the proceeds of personal loans are used for construction or purchasing a house the borrower can avail tax deduction under section 24. Under section 24, if you take a loan for construction, purchase, or renovation of your house property, the interest accrued on the loan amount is allowed as a deduction from the Net Annual Value (Net Income) of the property. The maximum amount of deduction allowed under section 24 is ₹ 2,00,000 for let out property, self-occupied property and deemed to be let out property. To claim the deduction, you need to submit a certificate issued from the borrower’s bank which certifies that the loan were utilized for construction, purchase or renovation of the property.

Personal Loan For Purchase of Any Other Asset

If the personal loan has been availed for purchasing assets like shares, jewellery or non-residential house property etc. the amount of interest paid during the year on such loan is not an allowable expense. However, the same gets added to the cost of acquisition of the asset, which reduces the capital gains on the asset at the time of its sale, thus reducing the capital gains tax liability on the sale transaction.

Points to Note Regarding Tax Benefit on Personal Loan

  • When you take a personal loan, it is not taxable as the amount received on loan is not considered as an income.
  • In order to be eligible for claiming personal loan interest exemption in income tax,you must submit adequate -proof to income tax authorities to support your claim in the form of a bank certificate or auditor’s certificate.
  • If you want to claim tax benefit on a personal loan, you should keep a copy of all the important documents like sanction letter, expense vouchers, auditor’s report and bank certificate.

FAQs

Do I declare personal loans on taxes?

Since the personal loan does not form part of income, you are not required to be disclose it for income tax purposes.

How do loans affect taxes?

Loans are not considered as part of income, so they are not taxable. However, you can claim a personal loan income tax rebate if you use the funds for certain usages, such as residential property construction.

Does a personal loan count as income?

No, a personal loan does not count as income.

Is personal loan tax exemption for salaried employees?

Yes, if you are a salaried employee, you can claim a personal loan deduction in income tax. The personal loan exemption in income tax can be claimed for a house improvement or renovation and purchasing assets such as gold jewellery and shares.

Is a personal loan for marriage exempted from tax?

You cannot claim a personal loan income tax benefit if you have availed of a personal loan for marriage.

Does a personal loan come under 80C?

Yes, under Section 80C of the Income Tax Act, you can claim an income tax rebate on a personal loan if you have availed of a personal loan to construct a house or home improvement.

Do personal loans affect income tax?

The expenses incurred on personal loans do not come under the tax liability purview and are generally not tax-deductible.

Can you claim a personal loan interest deduction in income tax?

No, you cannot save personal loan tax on the interest paid. The personal loan income tax benefit is only available for specific usages such as business expansion, home renovation or purchasing assets like gold or shares.

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