Few Smart Things to Avail Tax Benefits On Personal Loan

Niti Sharma

- 23-Dec-2020

A personal loan is what so many borrowers apply for. It is because it is collateral-free and comes with instant approvals along with quicker money disbursements.

But since being unsecured, it carries a higher interest rate leading to the payment of bigger loan EMIs.

However, if your credit score, repayment, and income history is stable, then you may ask for a lower rate.

You can also make the most of the tax benefit on personal loans and bring down your outgo.

The Income Tax Department does not have any particular personal loan tax benefits to award you. But you can save the way you use the loan money. Let’s know more about this!

What are the ways you can pocket tax benefits on personal loans?

Personal loans are not taxable. But the way you use the loan amount, you can enjoy some personal loan benefits as far as the saving of taxes is concerned.

Let’s take a quick look:

Using the loan money for business

If you are looking to use the personal loan amount for business purposes, then you are liable to claim interest paid on it as a tax-deductible expenditure. Your tax liability gets reduced because the interest is deducted from the profits of your business.

Using the loan amount for buying or building a residential property

Have you availed of the personal loan facility to purchase a residential property? If yes, then section 24 of the Income Tax Act lets you pocket tax deductions. It also includes availing of a personal loan to renovate your home. This way, you can get a tax deduction of up to Rs.2 lakh on a home that is self-occupied. If you have given the home on rent, then there is no cap as such.

Using the loan figure for buying any other asset

If you have taken the personal loan to bring home an asset, then you are liable to get tax deductions on the loan's interest rate. Nonetheless, you are not authorized to claim the personal loan tax benefits in the same fiscal year. However, it is added to the acquisition cost. And on selling the asset, you can claim the tax benefits. In this regard, the increased cost of acquisition brings down your capital gains.

What should you consider while availing of personal loan tax benefits?

You will need to furnish documents such as a bank certificate, sanction letter, expense voucher, and auditor’s report to get tax benefits on personal loans.
You can use the personal loan EMI calculator to know an exact payable EMI amount to know your outgo.
You should get in touch with your financial expert to help you know the exact tax benefits that you will be able to enjoy in a financial year.
The personal loan interest rate is higher as it is unsecured. It is where the borrower can reduce their outgo by availing the tax benefits.
To avail of the best personal offer in the town, you can compare all available deals online on a third-party website and pick the best one.