How to Claim Income Tax Benefits on Personal Loans

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Personal loans have emerged as one of the significant financial tools in India to avail quick and hassle-free finance for diverse purposes.

You are also free to use the loan amount for sending your children for higher education, debt consolidation, going on a vacation, medical emergency and other needs.

Also, personal loans are unsecured loan facility which means no submission of collateral or security. As a result, the personal loan interest rate charges may be a bit higher. However, borrowers with a robust CIBIL score may negotiate for a lower rate.

While applying for the loan, many borrowers are often confused if they can avail any personal loan tax benefits or not.

Hence, if you are looking to get some information on the personal loan tax deduction, then here is a post that will help you explore more. Read on!

Personal loan exemption in income tax at a glance

When it comes to the personal loan tax benefits, there is no mention of any such provisions under the Income Tax Act. But, that does not mean that you can’t avail of any personal loan tax deductions.

As there is no specified mention of personal loan exemption in income tax, the reason for which a borrower avails it will be considered to grant exemptions on the same.

Thus, you can avail tax benefits on personal loans only if you had availed it for a reason for which the deduction in income tax is allowed. Personal loan tax deductions are allowed only in the event of three situations. Have a look:

Conditions under which you can get personal loan tax deductions

  When you invest the loan amount in business

If you have invested the loan amount for your business, then the interest paid on it can be claimed as an expense. Hence, it may reduce your tax liability and lessen the net taxable profits of the business in which they have invested the loan amount. There is no mention of the minimum or maximum amount that can be claimed.

 When you use the amount for buying/construction of a residential property

Anyone using the loan amount for buying or construction of a residential property can avail personal loan tax deductions. The tax benefit on repayment of interest for the same could be availed under Section 24 of the Income Tax Act. The maximum personal loan exemption in income tax that could be claimed is Rs.2 lakh. It is for the home occupied by a borrower. If you have rented the same home to someone else, then there is no cap on the amount that can be claimed. The personal loan borrower needs to be the owner of the property to avail tax benefits.

 When you use the loan amount for investments in assets

The final case is when you use the loan amount for investing in assets. Such assets could be non-residential property, shares, jewellery, some stocks and others. You can’t claim the personal loan tax deduction in the year when the interest is paid. But, it would be added to the cost of acquisition. You can claim tax benefits in the year in which you sell the mentioned assets. The deduction of taxes will be allowed only for interest amount and not on the principal loan amount.

You are now aware of the situations when you can grab personal loan tax benefits. Anyone using the personal loan amount other than the discussed situations is not eligible for any tax benefits.

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