Personal loans are ideal and the most accessible means of raising finance. It is gaining momentum with various loan platforms coming up every day. They are unsecured, and the means are very easy to get.
The amount can be received as per your creditworthiness. Although the interest rates are a bit higher given the risks of default cannot be fully covered, they serve various purposes like children’s education, a new house, or any other personal needs. But at the end of the day, the question is would we get any deductions on such loans?
Effectively, any personal loan taken under the Indian Income Tax Act does not qualify for any deductions. The principal amount can be either taxable or non-taxable depending upon the source. In case, it is taken from your family member, it is considered as part of your gross income and is not deductible. Further, if this loan is taken from banks, NBFCs, or any other financial institutions which are legally approved, this principal amount forms part of liability and hence non-taxable.
The only other possibility of getting any deduction is the interest on the personal loan. There are certain conditions concerning the final usage of your loan amount which are considered for any type of tax deduction. These conditions are elaborated below:
Business Use: In this case, the personal loan amount is invested in the borrower’s business. This means that the interest on the loan would be considered a liability for the business. Further, this interest paid is considered to be an expense for the business which can be deducted from the net profit, effectively bringing down the amount of taxable net profit. This means that the whole interest amount can be tax deductible if it is used in a business.
Buying/Constructing House Property: Section 24 of the Income Tax Act mentions the ‘deductions from house property’. It mentions that the interest amount on the funds acquired through a personal loan that is used for constructing, purchasing, or renovating a house property, can be deducted from net taxable income from residential property. If all the documents are well furnished, deductions up to Rs. 2, 00,000 can be claimed under this.
Assets Purchase: In this case, if the borrowed amount is used for buying any non-residential asset such as jewelry or shares, immediate tax benefit cannot be claimed. However, the interest on the loan amount which has been used to buy the asset is added to the total acquiring cost of the asset. Hence, if the same asset is sold, the particular interest amount is deducted from the capital gains, which effectively reduces the taxable profit.
Even though there are no explicit guidelines for deductions on personal loans given in the Income Tax Act, the vagueness has allowed people to get and ascertain tax deductions through other means. But one thing that stays constant, that is these tax benefits on personal loans can be availed only if done under proper means with proper documentation. Therefore one should always ensure that all the documents, bills, invoices, etc. are kept safe and ready for use.
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