Personal loans are one of the most popular types of non-food credit available in the Indian financial market. The unmatched conveniences like competitive personal loan interest rates, zero end usage restrictions, and tax benefits on a personal loan make it an attractive and affordable option for both salaried and self-employed individuals.
Unlike other types of unsecured credits, the tax benefits on personal loans make them better suited for individuals who want to invest the sum for specific purposes.
The Income Tax Act of India does not have any specific regulation on tax benefits on these advances; however, the interest paid during repayment will be exempted from taxes as the money is not considered as an individual’s income. One condition is that the borrower can only utilize that amount for any of the following purposes.
- Construction of a residential building – Tax benefits on a personal loan can be availed if the borrower uses the sum to build a residential property. It falls under section 24(b) of the Indian Income Tax Act where the interest component of the loan will be eligible for tax deductions up to Rs.2 lakh.
Most financial institutions offer up to Rs.25 lakh as a personal loan. It can provide the necessary financial backup for home construction.
- Home renovation or improvement – Tax benefits on a personal loan is also applicable if a borrower utilizes the loan amount to renovate or improve his existing home. In this case, the maximum deductible sum will be Rs.30,000 and the taxpayer has to show specific proof of expenses indicating that the money was utilized for renovation or improvement itself.
- Investing in businesses – A borrower can invest the sum acquired from a personal loan into a business and enjoy tax benefits on its repayable interest. It will be considered as an expense on the organization and tax deduction will be calculated on the business’ profit and gross revenue. It will lower overall tax liability.
There is no set limit on the number of tax benefits borrowers can get if they invest the sum in their business.
Other than the above-mentioned scenarios, borrowers can also benefit from taxes if they purchase an asset with the help of a personal loan. The liability of the capital gain will be reduced at the time of selling that asset in question. It also has no limit on the total amount of tax exemption and can help a borrower save a significant amount of money.
However, there are certain factors a borrower should remember about tax benefits before availing a personal loan. Let’s take a look.
- A borrower has to submit adequate proof to income tax authorities if they want to be eligible for tax deductions on the paid personal loan interest rate. These can be a bank certificate or auditor’s certificate.
- The Income Tax department might ask for important documents such as sanction letters and expense vouchers for assessment. Without these documents, the borrower might not become eligible for the benefits.
Benefits of availing a personal loan
A borrower can enjoy several features and benefits along with tax exemptions when he/she avails a personal loan. Financial institutions including NBFCs such as Bajaj Finserv offer such credits against minimum documentation, instant disbursing, flexible repayment tenor, easy to meet personal loan eligibility criteria, and various such benefits. One can also use an online personal loan eligibility calculator to determine the exact amount of money one will receive from the lender.
Bajaj Finserv also provides pre-approved offers on personal loans as well as unsecured credits like business loans, secured advances like home loans, along with a range of other financial products. Such offers not only simplify the process of getting funds but also helps save you time. You only have to share some essential details online to check your pre-approved offer
Personal loans offer the flexibility to utilize these funds in various ways while enjoying significant tax benefits. It makes it an ideal financial tool for everyone.
Also Read: Corporate Credit Card: How It Helps Small and Medium Business during a Crisis