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Tax Benefit on Personal Loan

Personal Loan Tax Benefit

Last Updated 25th Jul 2021

  • Tax benefit on personal loan can be claimed 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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Personal Loan Tax Exemption

Indian Income Tax Act allows for various tax deduction and exemptions on interest expenses and principal repayment for an education loan or a home loan. However, there are no tax deduction or exemption allowed on personal loans. Deduction on interest expense of personal loan is available in certain circumstances based on the purpose for which the loan has been availed.

How to claim tax benefit on personal loans?

Income tax deductions on interest paid on personal loans is allowed, if the loan has been availed 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 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 the business of the borrower, then the interest paid on the loan can be claimed as a tax deductible expense. Interest paid can be deducted from profit before calculating the tax liability, thus reducing the net taxable profit of the business thereby reducing the tax liability. There is no prescribed maximum limit for the interest amount which can be claimed as a tax deductible expense.

Personal Loan for purchase or construction of residential property

If the proceeds of personal loans are used for construction or purchasing a house then 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 have been of 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 tax deduction on the interest paid on your personal loan, 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, you might need to submit them to income tax authorities for assessment.

FAQs

Do I declare personal loans on taxes?

Since the personal loan does not form part of income, it is not required to be disclosed for income tax purposes.

How do loans affect taxes?

Loans are not considered as part of income, so they are not taxable. The taxable benefit arises when they are used for specific purposes, and you are repaying it from your income.

Does a personal loan count as income?

No, a personal loan does not count as income.

Are car loans exempted from income tax?

The funds borrowed as a car loan is not taxable.


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