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Tax deduction on personal loan? Top details for you to know!

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From tackling unforeseen medical costs to funding higher education, you can use an unsecured personal loan to cater to a wide range of needs. It’s no wonder it is such a popular choice among Indians!

As a salaried employee, you may know the common ways to enjoy tax benefits when it comes to other financial undertakings. But, with the collateral loan, you must be aware of a few facts related to tax. While you may think that repaying a personal loan does not provide tax benefits, the fact that you can claim tax deductions on the interest paid on a personal loan is unknown to many.

Here are the provisions for claiming tax benefits on personal loans.

Avail tax benefits when using a personal loan for business purposes

When you avail a personal loan for business requirements, the interest you pay is considered a business expense as per Section 37. In such a scenario, the interest is deducted from the total business profit. This way, your taxable amount on the net profit decreases.

Best of all, there is no cap on the amount you can claim as the expense made towards business. This is one of the easiest ways for a business entity to reduce its taxable income. With such tax provisions on these loans, it is no surprise that entrepreneurs and small firms rely on personal loans to meet business needs.

Spend on higher education to enjoy tax exemption on personal loan

Another option for claiming tax benefits on the interest dues is using a personal loan to fund higher education. As per Section 80E, you are eligible for tax deductions when the loan amount is used to manage higher education costs.

Do note that this tax exemption applies only to the interest you pay towards the loan. So, you cannot claim it on the principal loan amount.

Similar to using a loan for business purposes, there is no upper limit on the interest you can claim towards tax exemption. While Section 80E has a tax deduction provision of up to ₹1.5 Lakhs for expenses related to education, you can claim deductions for interest via a personal loan over and above this amount.

Another striking feature of this tax exemption provision is that you can enjoy tax benefits even if you are the legal guardian of the student with the personal loan in your name.

Renovate your home using a personal loan to get tax benefits

You may want to enhance your home by undertaking construction activities or invest in a property. According to Section 24 (b), you are eligible for tax benefits when you use a personal loan to purchase or construct your home.

Here, the interest you pay on the collateral loan can be considered for tax deductions. If this is for a self-occupied residence, you can claim exemptions up to ₹2 Lakhs. However, if this is for a property that is let out, there is no cap on the exemption.

If you are investing in a house under construction, you are eligible for tax exemption only after the house construction is complete. Remember that your house needs to be completed within a span of 3 years from the approval of the personal loan.

This way, you can enjoy tax rebates for home repairs or renovations if you are utilising a personal loan to meet these expenses.

Personal loans tax deduction

Enjoy tax exemption benefits by investing in assets

Purchasing non-residential assets, including jewellery and shares, also attracts tax benefits on the interest paid towards your personal loan. The interest payable is added to the total asset acquisition cost, allowing you to enjoy tax benefits.

However, in such cases, you cannot claim tax rebates when buying these assets. Only when you sell them the interest paid is deducted from capital gains. These gains are computed by reducing the acquisition cost from the total selling price. So, selling these assets can reduce your tax liability.

As you can see, you can enjoy tax benefits based on the purpose you use the collateral loan amount for. This makes a collateral loan an even more attractive solution for addressing planned and unplanned expenses.

To get quick approval on personal loans along with a hassle-free application process, download the Bajaj Markets App from the App Store or Play Store. Using it, you can compare the best personal loans and avail financing affordably.

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