Is Personal Loan Tax Deductible ?

Personal Loan

Personal Loan is an unsecured loan to meet the financial requirements of the salaried individual. Personal Loan is availed for a variety of reasons-

  1. Child’s education
  2. Wedding
  3. Debt Consolidation
  4. House renovation
  5. Travel
  6. Medical Emergency and much more

Now we discuss the tax benefits on Personal Loan.

Are Tax Benefits on Personal Loan possible?

Under the Indian Income Tax Act, tax deductions and exemptions were allowed on Home loan, Business loan etc. But there are no tax exemptions on Personal Loan. 

In order to avail tax benefit, you should take the personal loan for specific purposes which includes tax deductions.

Now we will discuss the cases for which tax benefits on the personal loan is possible.

Cases for Tax Benefits on Personal Loan

Tax deductions on Personal Loan are circumstantial and purpose specifically. Following are the purposes for which Personal Loans are tax deductible-

Personal Loan for Business

  • If the Personal Loan is avail to invest in the business of the borrower, then the interest on the loan is considered an expense which is tax deductible. 
  • This interest paid on the loan will be deducted from the net profit of the business. This in turn will reduce the net taxable profit finally resulting in reducing the tax liability. 
  • In this case, there is no limit on the amount of interest which is claimed for the tax deduction.

Personal Loan for buying an asset

  • The tax deduction is available when you opt for a personal loan to buy assets like- jewelry, stocks, shares, non-residential property etc. 
  • But the interest paid is not tax deductible in the same year immediately. It will be added to the cost of acquisition of the asset which will reduce the capital gain on the asset. 
  • The reduced capital gain will reduce the tax liability. The tax benefit will be possible when you will sell the asset.

Purchase/Construction of real estate property

  • If you are taking a Personal loan to construct or purchase a residential property, you can avail tax benefits under Section 24. 
  • According to Section 24, if you apply for a personal loan to purchase or construct a house, the interest on the loan to be paid will be reduced from the Net Asset Value (NAV) of the property.
  • In case of self-occupied property, let out property, deemed to be let out property, the maximum amount of tax deduction is Rs. 2 lakhs. 
  • In case of rented property, the tax benefit is applicable to the entire interest paid on the home loan. 
  • For down payment also, the tax benefit is possible. 
  • For the home improvement loan, the maximum interest amount to be claimed as a tax deduction is Rs. 30,000.
  • It is worth mentioning that, the tax benefit is not applicable for repayment of the principal amount. But it is only applicable for the amount of interest paid.
  • To claim the tax deductions, you will have to submit a certificate issued from the borrower’s bank which authorizes that the loan taken was used for construction/purchasing a residential property.

Points to remember for Personal Loan Tax Benefit

  • When a personal loan is disbursed, the tax is not levied on the hands of the borrower because the loan amount is not an income but a loan.
  • To be eligible for claiming tax deductions, you need to submit valid documents for the specified purpose-oriented loan.

If you want to claim for tax benefits on a personal loan, you should keep a photocopy of documents like- sanction letter, amount of loan taken, amount and interest to be repaid, auditor’s and bank certificate and expense voucher.

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