Personal loans are some of the most sought-after arrangements to meet sudden financial emergencies. Apart from that, borrowers can use it due to unrestricted end-use for any purpose like marriage, education, business, travel, etc. A common belief among people is that personal loans do not offer tax benefits, unlike home loans. The funds are not dedicated to single-purpose but can be used for varied purposes. However, the reality is not the same. In this guide, we will list out four purposes where you can claim tax benefits on interest paid on benefits of a personal loan:
- Home purchase and construction
While dedicated home loans are used for home purchase and construction, personal loans can meet any shortfall. This is a common scenario where home buyers meet the shortfall in budget using personal loans, but they are least aware that the interest paid on personal loans can be claimed as a deduction under Income Tax Act, 1961. The only proof you need to furnish is that the funds from the personal loans are used to purchase or construct the house.
Business witnesses many ups and downs, and there might arise situations where business owners may take loans to meet business expenditures. While dedicated business loans are available, some business owners go for personal loans due to instant approval and disbursement. In such cases, as the business owners are using borrowed funds for business purposes on which they are paying interest, such interest payments count towards business expenditure and, therefore, can be claimed as an expense in the Profit and Loss account. This reduces the profits of the business, ultimately leading to tax savings.
- Purchasing any asset
If you have purchased any asset like gold, ornaments, real estate, etc., using personal loans, then the interest paid on personal loans count towards the cost of acquisition of that asset. In Income Tax, while calculating the gain from the sale of an asset, the cost of acquisition is reduced from the sale value of the asset. That’s how we derive the gain from the asset. As personal loan interest is added to the acquisition cost, the gains get reduced, ultimately leading to tax savings.
Suppose you are the one fulfilling your dreams of higher education through personal loans. In that case, you will be happy to know that the interest you pay on personal loans can be claimed as a deduction from the total income under Section 80E of the Income Tax Act, 1961. The benefit is restricted to the interest portion and not the principal amount. Also, the funds should be used for higher education only. The deduction can be claimed up to the limit of Rs. 1,50,000 in a financial year.
Preplan your Loan with Personal Loan EMI Calculator
If you want to preplan your EMIs, you can use a personal loan EMI calculator. By entering the loan amount, tenure, and the personal loan interest rate, you will get to know the amount of EMI due each month and accordingly plan your finances.
Even though benefits of a personal loan are not dedicated loans for a single purpose, they do offer tax benefits, and the borrowers, if aware, can gain from tax savings on their income. This reduces the cost of borrowing for the borrowers. Thus, if you are looking to avail of or have already availed the personal loan for the above purposes, claim the deduction while filing your income tax return to reduce your taxability.