Personal loans have saved the day for many, serving a multitude of immediate and necessary financial requirements. Personal loans are not only hassle-free to obtain but when used wisely, can help reduce your income tax liabilities.

Get complete mileage from your personal loan with MYFI’s ready tips to avail income tax benefits.

What you should know

Personal loans do not form part of your income and as a result, is not taxable. To meet this criterion, your personal loan must be from a secured source like a financial institution or bank. Remember, that loans availed from unsecured sources will be included as part of your income and will attract income tax.

The Indian Income Tax Act permits several exemptions and tax deductions on interest expenses and principal repayment for personal loans specifically housing loan.

  • Tax deduction on the interest component of personal loan is dependent on the purpose of the loan.
  • Tax deductions are allowed only on specific purpose loans such as house purchase/renovation, expansion of business etc.

Tax Benefit on Personal Loan

  1. Personal loan for a house
  • According to the stipulation of the Income Tax Act section 24(b), if the purpose of the loan is for construction or purchase of property, then the interest amount towards the loan can be claimed as an exemption from the taxable income.
  • Interest on the personal loan up to Rs.2 lakh can be deducted for a self-owned property. For a rented house, the complete interest paid on the personal loan is taken into consideration for tax benefit.
  • It is mandatory to have all the necessary documents (certificate from the bank that issued your personal loan) to support your claim that the entire loan amount was utilized for purchase, construction, or renovation of the property.
  1. Business/buying assets other than property
  1. If your personal loan amount is used for business expansion or buying assets other than the property, then the interest paid on the loan will be considered as a tax-deductible expense. Essentially, the interest paid will get included within acquisition costs of assets and lower capital gains.
  2. In business, the interest paid towards loan is deducted from profit before arriving at the tax liability. Further, there is no stipulated maximum limit for the interest amount that can be claimed as a tax-deductible expense.

Important pointers

  • To be eligible to claim a tax deduction on the interest paid towards your personalloan, you need to submit necessary documents to income tax authorities to support your claim.
  • Keep a copy of all the crucial documents for instance – expense vouchers, sanction letter, auditor’s report and bank certificate, which you will need to submit to income tax authorities for assessment.

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