How to Avail Income Tax Benefits on Personal Loan

Personal Loans provide individuals the flexibility to meet any financial exigency, such as buying a gadget, home renovations, travel expenses, or unforeseen medical or educational expenses. These loans are easily accessible to borrowers with lenient eligibility criteria but shorter repayment tenure.

Furthermore, personal loans are unsecured loans that don't require any collateral like home loans or education loans. However, when it comes to tax benefits, Personal Loans do not offer the same benefits as Home Loans or Education Loans. While the funds from Personal Loans can be utilised for various purposes, the tax benefits are limited to a few end uses only.

Let’s understand personal loan tax implications further.

Is personal loan tax exempted?

There are no taxes on personal loans, as availing of personal loans does not mean an increase in your income and is not included when calculating your income tax.

Tax benefits with personal loans

Generally, Personal Loans do not offer specific tax benefits; however, certain situations allow for tax deductions on personal loans: based on its end use. To avail of the tax benefits on your personal loan, you must be able to provide evidence of its use.

Home Renovation: Personal loans for home renovation or repairs are eligible for a tax deduction as per Section 24(b) of the Income Tax Act. This provision allows deductions of up to Rs. 30,000 annually on the interest paid for the loan.

Home Purchase or Construction: Personal loans taken for buying or constructing a home, specific tax benefits are available. If the property is your residence, you can claim an interest deduction of up to Rs. 2,00,000. However, the entire interest qualifies for a tax deduction if the property is rented.

Education: Utilising a personal loan to finance higher education for yourself, your spouse, or your children allows you to claim tax deductions under Section 80E. This benefit remains applicable for a maximum of eight years or until the loan's complete repayment, whichever occurs earlier.

Business capital: If you avail of a personal loan for investing in a business venture, you can claim personal loan tax benefit on the interest paid as a business expense, under Section 37 of the Income Tax Act.

Conclusion

Securing tax benefits on Personal Loans is feasible but limited to specific scenarios. To know if your Personal Loan qualifies for such benefits, it's advisable to consult a tax expert or your lending institution. Essential to this process is maintaining proper documents to support the end use of the loan. By adhering to these guidelines and ensuring proper documentation, one can easily understand the complexities of tax deductions and exemptions associated with Personal Loans and avail the tax benefits on this loan.