How to Avail Tax Benefits on Personal Loan?

Loan providers have helped millions of people get money right in a time of need. From unexpected bills & medical emergencies to new phones & solo trips, personal loans empower you to make it all happen.

But want to know another good thing about taking personal loans?

Personal Loan Tax Benefit!

Yes, you read that correctly. You can claim tax benefits on the personal loans you take when you file your returns.

Now that the tax filing season is getting closer, read on to understand the eligibility criteria to claim personal loan tax benefit!

Are Personal Loans Taxable?

Since personal loans are not a part of your income, they’re not taxable. This means, there are no additional tax benefits on them.

However, there are certain scenarios in which you may be able to claim some benefits on them. But this will only be applicable if you borrow money from a bank or NBFC that holds a RBI license and follow all the regulatory practices for the same. You will also require the appropriate paperwork and evidence for it.

Want to know in which scenarios you can personal loan save tax? The keep reading this blog:

Here are the 3 scenarios in which you can claim for personal loan tax benefit

1) You Use Your Personal Loans in Purchasing, Renovating or Renting a Property

Under Section 24(b) of Income Tax Act, 1961, if you use your loan amount in constructing or purchasing a piece of property, you can be exempted from the interest rate paid on it.

You can claim the interest in 3 circumstances:

• If you use your personal loan in acquisition, construction, repairing or re-construction of your let-out property.
• If you use your personal loan in acquisition or construction of a self-occupied residential property, you are exempted the interests up to ₹2 lakhs.
• If you use your personal loan for home renovation or reconstruction, repairs or renewal of a self-occupied residential property, you are allowed a deduction up to ₹30,000.

Keep all the relevant and important documents handy to claim these deductions.

2) You Invest Your Personal Loans in Business

If you have invested your personal loans into your business, then the interest rate charged on that loan is considered as an expense.

If you’re wondering, “Can a personal loan save tax?”, the answer depends on how you use the loan. While you can’t claim a tax deduction in the same year, the interest paid on a personal loan used to purchase an asset (like property or investments) is considered part of the acquisition cost. This means you can claim the interest amount as a deduction when you sell the asset, potentially reducing your capital gains tax liability.

Under Section 37(1),you can claim the interest of the loan you invested in your business. The deduction can be applied either for investment or the expansion of your business.

Be sure to provide the appropriate documentation that shows the loan was invested in or expansion of the business.

3) You Invest Your Personal Loans in Other Assets

If you are investing your personal loans in certain assets such as jewellery, shares, or non-housing properties then you can claim the tax deducted on the interest.

You won’t be able to claim the deduction in the same year but the interest amount for purchasing the asset is considered as an acquiring cost. You can claim the interest in the year you sell off the asset.

Also Read: What is Form 16? Differences Between Form 16, Form 16A, 16B

In Conclusion

The personal loans you take are not taxable, because they aren’t a part of your income. And now you also have unlocked an added advantage of saving taxes on your personal loan.

If you’re considering “Can a personal loan save tax?”, it’s crucial to borrow from a legitimate source. Avoid suspicious lenders, as funds received this way may be treated as taxable income, making it ineligible for tax deductions. To ensure tax benefits and financial security, always opt for a registered bank or NBFC when taking a personal loan.

For instance, Zype is a fintech platform that follows all the regulatory requirements, making it a credible source through which you can avail a personal loan and claim personal loan tax benefit.