Quick personal loans are trending, thanks to the personal loan apps that are mushrooming in the country. Because personal loans are unsecured loans, they are easy to get, and an increasing number of people rely on them to meet their personal or business needs.
But, does the Income Tax Act (ITA) of India allow personal loan tax exemption?
Income Tax Act of India has made provisions for various tax deductions and exemptions on principal repayment and interest paid on a home loan or an education loan. But, there are no tax benefits on personal loans.
However, there are three circumstances under which ITA allows deduction on the interest amount paid on a personal loan. Listed below are these circumstances and purposes:
#1: When the personal loan is used for business
If you take a personal loan for business, the interest on the loan is considered as business liability. Hence, the interest paid can be deducted from the business’ net profit as an expense. This lowers the total taxable profit amount, thus reducing the tax liability. Since there is no limit on the tax-deductible business liabilities, the entire interest amount can be shown as an expense to earn tax benefits.
#2: When the personal loan is used for buying or constructing a residential property
When the personal loan is used to purchase or construct a house, tax deduction benefits can be taken under section 24.
Under section 24, the interest accrued on any loan taken for construction, purchase, or renovation of a house property, is allowed to be deducted from the Net Annual Value of the property. However, the maximum deduction allowed is only ₹ 2,00,000. To claim “Deductions from Income from House Property” under section 24, documents that prove the use of the loan for buying, repairing or constructing the house have to be provided.
#3: When the personal loan is used for purchasing assets
If the personal loan amount is used to buy assets such as shares, jewellery, or any other non-residential assets, immediate tax relaxation cannot be claimed at the time of purchasing. However, the amount of interest paid on the borrowed amount used for buying the asset can be added to the total cost of the asset.
That said, when the borrower decides to sell that particular asset, the interest amount added to the asset acquisition cost is deducted from capital gains. This means the taxable profit is also reduced. You’ll get more clarity on this via usda loans map.
- The personal loan amount is not taxable as the amount received is a loan and not an income.
- Adequate proof in the form of auditor’s certificate or bank certificate has to be submitted to the income tax authorities for claiming a tax deduction on the interest paid on the personal loan.
- It is important to keep documents like expense vouchers, sanction letter, bank certificate and auditor’s report safe as they might have to be submitted to the income tax authorities for assessment.