There are no deductions for a personal loan, though tax benefits can still be availed if there is no reason for taking the loan, such as purchase/construction of a residential property, purchase of assets, and business investment for which the deductions are permitted.
A personal loan is basically a kind of option which offers finance for an individual’s personal financial expenses, and it can be funding for a wedding or a vacation. There is a high-interest rate that is associated with personal loans when compared to other loans, and they are generally short term loans. The personal loan eligibility criteria are much lesser compared to other loans, which makes it easier to apply for. The individual also gets an advantage to the personal loans as he/she also gets tax benefits under a personal loan. The Indian Government grants tax benefits for the repayment of loans.
Tax benefits for personal loans
Under the Indian Income Tax Act, there is no mention of any special deductions for personal loans, but for other regular loans like home loans, education loans, etc., there are tax deductions. But there is no implication that an individual cannot avail tax benefits under the personal loan. Under the Indian Income Tax Act, there is no special mention of tax deductions for personal loans, but in order to grant tax deductions for personal loans, the reasons under which the individual is availing a personal loan is taken into consideration. In case of personal loan, tax benefits can be availed by an individual only if while taking the personal loan, the individual had a reason for which income tax deduction is allowed. There are three cases under which tax deduction for a personal loan will be allowed.
Invest in Business
The interest that has to be paid can be claimed as an expense if the investment in the business has been made with the help of a personal loan. This is going to reduce the net taxable profit of the business they have invested in and bring down the liability of the tax of the borrower.
Construction of a residential property/Investment for the purchase – If an individual has used the personal loan money for the construction or purchase of a residential property, that person can avail tax benefits from their personal loans. Under Section 24 of the Income Tax Act, 1961, for the repayment of interest, the borrower can avail of tax benefits. For a house occupied by the borrower, in this case, the maximum amount that can be deducted under tax deductions is Rs. 2, 00,000. If the house has been rented out to someone else, then there is no cap on the maximum amount that can be claimed. It is vital that the borrower should be the owner of the property in order to avail tax benefits.
Investment in Assets
The last and the third case where an individual can avail tax deductions under personal loans is in the cases where the amount of the loan has been invested for the purchase of assets such as certain stocks, shares, non-residential property, jewelry and more. The claim of deduction by the borrower cannot be made in the same year in which the interest is paid, but it is going to get added to the cost of acquisition. Tax benefit can be claimed by the borrower in the year in which he/she sells the asset.
It is necessary to note that only the interest amount of tax deduction is going to be applicable and not on the principal loan amount. If there are any other reasons apart from the ones mentioned above for which the individual has applied for a personal loan, then no tax benefits will be granted on the personal loan.