Did you know you can claim tax exemptions on a personal loan?
Kunal availed a personal loan for home renovation and repairs in his home. He was happy that the loan had solved his financial woes. However, the tax exemption was the icing on the cake. When the time to file his tax returns arrived, he claimed exemption for his personal loan.
Yes, a personal loan does allow tax exemptions, but this comes with certain conditions. You get a tax exemption only upon using the loan for specific kinds of expenses. For example, the tax benefit would apply if you use the loan to buy or renovate your home. You would get a tax incentive for meeting business-related expenses or buying certain assets. You could even claim exemption on the interest payable for such a loan. Moreover, the funds that you receive from the borrower are not taxable in your hands. That is because it is not considered your income.
Also Read : How to Get Tax Benefits on Personal Loan
Let us see how a personal loan can help you finance your personal expenses and save on taxes.
- When you buy a house
Say, you use the loan amount to buy a house for residential purposes. The interest you pay on such a loan is tax-free under Section 24(b) of the Income Tax Act. You can avail tax exemption on up to Rs 1.5 lakh. Now, imagine you use the loan to buy a property and then rent out the property. The interest paid on such a loan would also be tax-free. Even better, there would be no maximum limit on interest exemptions in this case. Even if you use the loan on construction of your home, the loan interest will be eligible for tax exemptions.
- When you renovate your home
The government realises that it costs a lot to not just buy a house, but to also maintain it over the years. This is why it also offer tax benefits on your home renovations.
Let’s suppose you opt for a Personal loan to fund renovations, then whatever you pay back as ‘interest’ on this loan can be used to reduce your taxable income. Your interest payments up to Rs 30,000 can help you avail a tax deduction.
- When you use the loan for education
Your Education loan too can be put to great use while calculating your Income Tax. Just like the Home Renovation loan, you can avail a tax deduction on all the interest you pay on your loan. But it gets better for two reasons. One, there is no limit on the interest amount you can deduct from your taxable income. Two, the loan need not be just for you—it can be for your partner or your child! That said, just remember: you cannot avail tax deduction on the education loan if your partner or child is already availing it.
- When you use the loan for business
Many people avail a personal loan to meet business expenses. They do this because personal loans are easy to get and quickly disbursed. Here, the interest payable under the loan is considered a business expense. This business expense reduces the net profit, thus resulting in a lower taxable income.
- When you buy other assets
You might use the loan to buy other assets. These may include jewellery, a property for non-residential purposes, or shares. The interest you pay for the loan would be added to the cost of acquiring the asset. You might even sell the asset later. Here the difference between the selling price and the cost of acquisition is the capital gain. Now, the interest component of the loan increases the cost of acquisition. This reduces the capital gain. Remember, capital gains are taxable. So, a reduced capital gain results in a reduced tax liability.
A personal loan used for any other requirements will not be eligible for a tax exemption. This includes using it to meet medical expenses, finance a wedding, or pay for a vacation.
Kunal availed a personal loan after doing some research. He ascertained his equated monthly instalments (EMIs) using a personal loan EMI calculator. He also gathered and submitted all the relevant personal loan documents. This made it easy for him to avail tax benefits on the personal loan.