Can you avail tax benefits on personal loan?

Borrowers can claim tax deductions of up to Rs 1.5 lakh under Section 80E of the Income Tax Act if they take a personal loan to fund higher education.
Can you avail tax benefits on personal loan?

NEW DELHI: Most of us take personal loans at some point in time. Generally, loan granted without any security or collateral is a personal loan. It is an unsecured loan. A personal loan does not have any tax benefits since the loan has been procured for meeting your financial requirements. However, very few people are aware that you can claim tax benefits on personal loans. Archit Gupta, founder & CEO of ClearTax says, “There are a few instances where an individual can claim a tax rebate on loans which they might consider as personal loans.”

Home purchase

“Personal loans aren’t tax-saving instruments as such. However, under special circumstances where applicants can show proof that the amount obtained from their personal loan is used for construction, purchase or repair of property, they can claim tax benefits under Section 24(b) of the Income Tax Rules,” says Aditya Kumar, Founder & CEO Qbera.com.However, he adds that  while this is true, tax benefits, subject to showing adequate proof, can only be claimed on the interest portion of the loan and not the principal amount in case of personal loans. The maximum deduction which can be claimed is Rs 2,00,000.

Funding education

Borrowers can claim tax deductions of up to Rs 1.5 lakh under Section 80E of the Income Tax Act if they take a personal loan to fund higher education, or for education-related expenses for themselves, their spouse, or children. This benefit is only applicable to interest payments for the loan, not the principal amount. In addition, if a borrower is a student’s legal guardian, he/she is also eligible for tax benefits.
When claiming a deduction on an education loan, it is essential to note that the loan must be taken for higher education. Only the interest portion can be claimed as a deduction. Deduction on an interest of education loan is covered under deductions under section 80E.

For investment purposes

Kunal Varma chief business officer & co-founder of  MoneyTap says, “Many entrepreneurs, start-up owners and small companies prefer applying for personal loans instead of business loans since personal loans usually get approved faster. A personal loan used to pay for business-related costs accrues interest that is treated as a business expense and deducted from the company’s net profit, thus lowering the taxable income, as well as the amount of tax business owners, must pay.”Where a sole proprietor has procured a personal loan and invested it in the business, the interest paid can be claimed as a business expense which will be deducted from the gross receipts thereby reducing the taxable income and eventually reducing the tax outgo.

Purchasing an asset

If a personal loan is used to buy shares, jewellery, non-residential property or other assets, the interest payable on it is added to the asset acquisition cost. Since taxable capital gains are calculated by subtracting the cost of acquisition from the selling price, borrowers’ tax liability becomes lower when they sell the asset.

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