Business

Here's how you can claim tax benefit on personal loans

Updated : January 30, 2019 03:31 PM IST

Considering the potential for large ticket sizes, the question of whether or not personal loans are tax saving credit instruments is often posed.

As such, there is no specific mention in the Indian Income Tax Act about personal loans helping individuals to save tax.

A personal loan is an unsecured credit product offered to salaried and self-employed individuals by banks, Fintech lenders, P2P lending platforms or private financial institutions and credit co-operatives.

Personal loans come in handy during phases of monetary shortfalls, and loan amounts offered can be as high as Rs 2500,000. Common parameters that lenders evaluate while processing loan applications include – an individual’s credit score, repayment history, income, employment stability and total outstanding debt.

Considering the potential for large ticket sizes, the question of whether or not personal loans are tax saving credit instruments is often posed. We’re adequately aware that home loans are tax-saving instruments owing to large ticket sizes, and a major chunk of a home-loan bearing individual’s income goes into the EMI payments.

But do personal loans help you save on tax too? Well, the answer to this depends on what you use the loan amount for.

As such, there is no specific mention in the Indian Income Tax Act about personal loans helping individuals to save tax. However, the interest paid is exempt from tax if the loan amount is used for any of the following purposes:

For construction/building of a residential property: If you use your personal loan to construct a residential property, you are eligible for tax deductions on the interest component of your loan. Under section 24(b) of the Indian Income Tax Act, you can claim tax benefits of up to Rs 200,000 on interest paid towards the loan. This holds true if you decide to live in the house you’ve just constructed.
For home renovation or home improvement: If you use your loan amount to renovate your home, you can claim tax benefits upon showing proof that the loan amount was specifically used for renovation. The maximum amount of tax deduction on personal loans used for home improvement is Rs 30,000.
For business purposes: If you choose to use your personal loan to invest in a business, the interest paid towards the loan is counted as an expense, and you will be eligible for tax deductions which will be adjusted with your company’s profits and gross revenue. The interest applicable on your loan can be deducted from your company’s net profit, and you will correspondingly have to pay taxes on the remaining profit. Your taxable profit is reduced, lowering your overall tax liabilities. Under this provision, there is no limit on the amount of tax you’re exempted from paying.
For purchase of an asset: Under this provision, you aren’t directly eligible for tax deductions. The type of asset purchased is also accounted for while considering tax exemptions on personal loans used for purchase of assets. If you purchase immovable assets (property for instance), jewellery or land, the interest paid over time will get added to the total cost of acquiring the asset, and at the time of sale of the asset in question, your capital gains liability will be reduced. Under this provision, there is no limit on the amount of tax you can be exempted from paying.

If you observe, personal loans aren’t particularly tax saving instruments like home loans or education loans. Depending on what you decide to use your loan amount for, you will be eligible for tax exemptions under corresponding, relevant sections of the Indian Income Tax Act.

Aditya Kumar is founder and CEO of Qbera.com.