Guest Post: Understanding the Tax Benefits on Personal Loan

Are Personal Loans Taxable?

The answer to this burning question is ‘No’. Personal loans are non-taxable loans because they cannot be considered as part of your income. This means that you don’t have to pay any tax on the loan amount. That being said, this applies only when you take a personal loan from a bank or a recognized NBFC (Non-Banking Financial Company), and not from a family member.

Let us understand the tax benefits on personal loan interest in detail.

There are some tax benefits on personal loans in India, but it depends on the end-use of the personal loan amount as decided by the Income Tax Act of India. One can avail of tax benefits only if the personal loan was taken for a reason for which income tax deduction is allowed.

Here are a few instances:

  • Personal Loan for Home Construction or Renovation

If you use the loan amount for the purchase or construction of a residential property, you can avail of tax benefits for the repayment of interest for the same according to Section 24 of ITA. The maximum tax deduction amount, however, is Rs. 2,00,000 if you occupy the house. But if you rent out the house to someone else, there is no cap on the maximum amount that can be claimed.

Moreover, if you avail of a personal loan for home improvements, you can claim a tax deduction of up to Rs. 1,50,000.

  • Personal Loan for Self-Employed Professionals

Tax exemptions can be availed on the personal loan for self-employed professionals when the amount is used for business. The interest paid on the loan can be claimed as an expense. This reduces the tax liability of the borrower and the net taxable profits of their business as the interest paid for the loan is deducted from the gross income while filing taxes. There is no cap on the amount that can be claimed in the case of a personal loan for self-employed professionals.

  • Personal Loan for The Purchase of An Asset

If you use the loan amount for purchasing an asset such as jewellery, shares, non-residential property, certain stocks, etc., then you can avail of tax benefit on personal loan interest. The borrower can claim the tax benefit in the year in which they sell the asset and not the same year in which the interest is paid because the personal loan interest is calculated as the cost of acquisition of the asset. Hence, the cost of acquisition reduces capital gains.

Summarizing Personal Loan Tax Exemptions

Here’s a quick table summarizing the above points for you –

Use Of LoanTax Treatment of Interest ExpenseInsinuations For the BorrowerExemption Limit
Residential Property ConstructionTax deducted from the net annual value of the propertyTax liability reduced as per applicable marginal tax rateUp to 2,00,000
For Self-EmployedCalculated as an expense from the borrower’s business profitTax liability reduced as per applicable marginal tax rateNo limit
Asset PurchaseInterest expense gets added to the COA at the time of sale of the assetTax liability reduced in the year of sale of asset as per applicable capital gains tax rateNo limit

It is important to note that the above tax benefits apply only to the interest amount paid and not the principal amount of the loan.

Taking advantage of the tax benefits on personal loan interest for the above-mentioned use cases can go a long way in lowering your overall costs which can help you save money and manage your finances better.

Guest Author Bio:

Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, and personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at [email protected]

Disclaimer: The views in this article are the author’s alone, they neither constitute advice nor a recommendation from IPO TANTRA.

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