In the current scenario, everyone is taking loans whether they are taking a loan for marriage purposes, for vehicle purchase, for business purposes or any other reason. It can be taken by security or pledge of any assets or if you are a salaried employee then also you can take a personal loan on the basis of your salary income.
What is a Personal Loan?
A personal loan can be obtained from a bank/financial institution or it can be taken from other persons e.g. relatives, friends etc. If the loan is taken from a bank/financial institution, it is easier to track by the income tax authorities and the same is not included in the person’s taxable income.
On the other hand, if the loan is taken from known persons, the assessee should take care that the transaction (receipt, Payment) should be through a banking channel otherwise the income tax authorities may consider it in the taxable income of a person.
You can actually claim tax benefits on personal loans in some cases like if a loan is taken for business purposes, meaning thereby if a loan is taken for business purposes then it will be allowed as an expenditure that taxable business income will be reduced by such interest amount.
Note: A loan should be taken from an authorized financial institution then only it will be considered a business expenditure.
Nowadays it is easier to get a loan for everyone and pay easily Equated Monthly Instalments (EMI) so people are living their lavish life with the loan scheme if this loan can be treated as an expenditure then it is also an advantage for the assessee that an allowable expenditure will not be a part of the tax.
How to Avail Tax Advantages from Personal Loans?
Personal loans provide financial aid without requiring collateral. While their interest rates may be higher compared to secured loans, you could qualify for tax benefits based on your loan usage.
Here’s a guide on claiming tax benefits on your personal loan:
Use Personal Loan for Your Business
If you utilize a personal loan for your business then you are enabled to claim the tax deductions on the payment of interest. It is counted under Section 36(1)(iii) of the Income Tax Act. Let’s suppose you choose to invest in your business by buying specialized equipment or raising your inventory. No upper limit on deductions is there it directs that you are able to claim the whole interest amount.
Acquisition or Renovation of Existing Property
For renovating or expanding your existing house, personal loans could be handy. When traditional home loan terms are not set within you or if you are living in a rented house then a personal loan, consider opting for a personal loan as a potential solution. You are enabled to claim for tax exemptions in the payment of interest under section 24(b) of the Income Tax Act.
For example when you decide to add a room to your house or renovate your terrace then you are able to claim the exemptions on the payments of interest. Owning a house grants you exemptions of up to Rs 2 lakh annually. Even if you reside in a rented property, you’re eligible to claim the entire interest amount.
Tax Relief Under Section of 24(b) I-T Act
Under Section 24(b) of the Income Tax Act, the interest paid on a personal loan can offer tax relief.
For instance, if you utilize the loan for home renovation, you can claim deductions of up to Rs 30,000 annually on the interest payments. Alternatively, if the loan serves educational pursuits abroad, the entire interest amount becomes eligible for deductions.
Conclusion
It’s crucial to grasp the terms of your personal loan thoroughly before deciding. When contemplating a personal loan, weigh these tax advantages and select the option that fits your financial objectives.
