All You Wanted to Know about Tax Benefits on Personal Loan
A personal loan is an easy way of procuring finance for any purpose. Whether you need finance to cover wedding expenses, or you want to fund your tour than the personal loan can come to your aid. You can also avail a personal loan in case of any medical emergency, or to fund the education of your child.
One of the prime reasons that personal loan is an easy way to avail finance because it does not require you to pledge or offer any asset as collateral to the lender, which is why it is an unsecured loan.
Since it is an unsecured loan, the rate of interest levied on the personal loan is higher than other loans which are secured in nature.
Although being unsecured loan makes them more easily accessible to many people who cannot avail of a secured loan due to the absence of any immovable property.
Is Personal Loan Taxable?
The loan you get from the bank as personal loan is not subject to tax as it is not considered as a part of your income for the purpose of calculating income tax.
So, you are not required to pay any income tax on the loan amount. However, if you avail loan from unverified sources which are anything except banks, NBFCs, or any recognized financial institution, then it can likely be considered as part of your income to calculate income tax.
A personal loan does have some tax benefits, which depends entirely on the end-use of the loan amount.
As per the Income Tax Act, you can get an exemption if the amount is used for education, purchase of House or renovation, business expansion, etc.
Personal loan for House
If you use the loan amount for the purchase or construction of a property, then as per Section 24 of the IT Act, the interest amount on that loan can be claimed as exemption from taxable income.
Thus, if you have availed a loan to buy or renovate the House, then you are eligible for deduction as per Section 24(b).
Personal Loan for Business or Purchase of Asset
If you are using the loan amount for any business purpose, then the total interest amount paid during that year will be deducted from the income from the business before arriving at the taxable income from the business.
Also, if the loan amount is used to acquire an asset for business, then the interest amount is added to the cost of that asset. Thus, if you are not eligible for a business loan, then availing a personal might be the solution you are looking for to grow your business.
A personal loan is an extremely useful source of funds whether you want to use it for any personal purpose or for business.
Although for availing the personal loan you need to make sure that you have a good credit score and a steady source of income because credit score and income are two of the most crucial eligibility factors for the personal loan.