Personal loans are one of the most popular financial vehicles that people consider when they need money urgently. Since you do not have to put any asset as a collateral, their interest rates are quite high. The good news is that there are tax benefits on personal loan depending on how you use the loan amount.
When Can You Claim Tax Benefits On a Personal Loan
- For Construction and Buying of a Residential Property
If you want to use your personal loan to construct a residential property, you are eligible for tax deductions on the interest component of your loan.
You can claim tax benefits of up to Rs. 2 lakhs on interest paid towards the loan. This is applicable if it is a self-owned house. In case of a rented house, the entire interest paid on the personal loan would be eligible for tax benefits.
Make sure you have all the related documents as proof of using the loan amount for the house.
- For Business Purposes
If you want to use the personal loan to invest in a business, then the interest you pay towards the loan is considered as an expense. You will be eligible for tax deductions that will be adjusted with the business’s profits and growth revenue.
You can deduct the interest applicable on the loan from the company’s net profit. You will have to pay taxes on the remaining profit. There is no limit on the amount of tax you’re exempted from paying.
- For Purchase of an Asset
If you use the loan amount for the purchase of assets other than property, then the interest paid will be added to the cost of acquisition. This will lower the capital gains and tax liability.
- For Home Improvement
If you apply for a personal loan to renovate your home, you can claim for a deduction of up to Rs 1.5 lakhs. You need to have the necessary proof to show that the loan amount was indeed used for house renovation.
Other Loans on Which You Can Get Income Tax Benefits
Apart from personal loans, you can get tax benefits from other types of loans as well. They include:
- Education Loan: Any interest paid towards the education loan is eligible for a tax deduction for a maximum of 8 years.
- Home Loan: Both principal and interest paid towards the home loan are eligible for a tax deduction. You can claim deductions of up to Rs. 2 lakhs on the interest of the EMI paid in one year.
- Car Loan: If you are self-employed and applying for a car loan for vehicles that are used for commercial purposes, you will be eligible for tax benefits.
- Business Loan: When you avail a business loan, you can deduct the interest paid towards servicing the business loan as a deductible expense. It can be deducted from the business’s gross revenue before arriving at gross income.
Personal loan taxes rebates are an incentive to reduce your loan burden. But make sure you do not borrow more than you can repay.