Generally, the personal loan is not taxable, as loans are not considered a part of your income when you are filing your IT returns. However, the personal loan must be from a valid source like a bank or other financial institution as loans from unknown sources may be considered as income while computing your taxes. Hence, you can claim the income tax benefits on personal loans. However, there are some conditions attached to it.
Whether you get tax benefits or not will depend on the end-use of the loan amount. If you have used your personal loan amount to acquire, construct, repair, or reconstruct a house or property, you can claim tax benefits. If you can prove that you have used the loan for a valid expense, you can actually claim tax deductions on the interest paid on the loan. You will be required to keep documents like bills and labor charges which will help prove that the loan amount has been used towards home buying or home repairing purposes, as they will be needed at the time of making claims.
Is a Personal Loan Taxable in India?
Generally, the amount you borrow is not taxable. That is, it need not be added to your taxable income while filing income tax returns. However, you have to ensure that you borrow the loan from a valid lender like a bank, NBFCs, or other professional lenders.
Informal loans borrowed from friends and family, or other unknown sources are considered as a part of your income, and you have to pay tax on it.
Do Personal Loans Offer any Tax Benefits?
The short answer – the availability of tax benefits, depends on the usage of the loan amount.
The long answer:
A personal loan can be divided into two components:
- Principal – This is the amount the lender provides you. You can use this amount for any purpose.
- Interest – This is the amount the lender charges you as a fee, on top of the principal.
While repaying the personal loan, you have to pay back the principal as well as interest.
Now, coming to the taxation rules:
Tax Benefits on Personal Loan in India
The Indian Income Tax Act (ITA) does not explicitly mention anything about personal loans. However, the Income Tax Act offers tax benefits for other loans like education loans, home loans, etc.
This doesn’t mean you cannot avail tax benefits when you take a personal loan. Since the ITA doesn’t mention personal loans explicitly, the purpose of usage of the loan is considered to enjoy tax deductions. As per the Indian Income Tax Act, Income Tax deductions on interest paid on personal loan are allowed when the loan has been availed for the below- mentioned reasons:
1. Personal Loan for Home Improvement
2. Personal Loan for Business Investment
3. Personal Loan for Purchase/Construction of a Residential Property
4. Personal Loan For Purchase Of Any Other Asset
For the construction of a Residential Property
Let’s say; you are in the process of constructing a home. Your construction cost overshoots your initial budget, and you take a personal loan to bridge the shortfall. In this scenario, you are eligible for tax deductions on the interest component of the personal loan.
According to Section 24(b) of the ITA, you can enjoy tax benefits up to Rs.2 lakhs for the interest paid on your personal loan, if you use the loan amount for the construction of a residential property. This tax benefit is applicable only when you reside in the home you’ve just finished constructing.
For Renovation or Improvement of a Residential Property
Let’s say, your home needs repairs and you take a personal loan to avail the funds. In such cases, you can enjoy tax deductions on the interest component of the personal loan you have availed.
However, remember that you have to submit proof showing that you have used the loan amount specifically for home improvement/renovation works. So, make sure to store all bills and receipts carefully, if you plan to avail tax deductions later on.
The maximum amount of tax deductions for personal loans used for home improvement/renovation is Rs. 30,000.
For Business Purposes
You can use a personal loan to meet fund requirements of your business like – stocking inventory, purchasing equipment, expanding the scope of the company, paying salaries, etc. In such cases, the interest component of the personal loan is considered as a business expense, and you can deduct this amount from the gross profit or revenue of your business.
This reduces your overall taxable income, thereby reducing your tax liabilities. When you use a personal loan for this purpose, there is no upper limit on the amount of tax exemption.
For Purchasing an Asset
If you use the personal loan amount to purchase an asset, based on the asset you are buying, you can avail tax deductions. For instance, let’s consider that you use the personal loan funding to purchase an immovable asset like property, shares, land, or jewellery – then the interest you pay for the personal loan is added to the total cost of acquiring the asset. You don’t enjoy any tax deductions during the purchase of the asset.
However, at the time of selling the asset, your overall capital gains liability is reduced, thus, reducing your taxes. In this case, there is no limit on the amount of tax you are exempted. Also, the deduction for this won’t be allowed immediately in the year in which the interest has been paid but would be added to the Cost of Acquisition and Tax Benefit would be allowed in the year in which such an asset has been sold. This will increase the Cost of Acquisition and in-turn reduces the Capital Gains which would arise on the sale of such an Asset.
Tax Slab FY: 2019-20
Tax benefits are something, which can work in your favour and help you save more money as far as availing a personal loan is concerned. Thus, it is also important to know the basic tax slab for the financial year 2019-20 to understand the tax liability.
|Annual Income Range
|Up to Rs. 2.5 lakhs
|Above Rs. 2.5 lakhs to Rs. 5 lakhs
|5% + 4% cess
|Above Rs. 5 lakhs to Rs. 10 lakhs
|20% + 4% cess
|Above Rs. 10 lakhs to Rs. 50 lakhs
|30% + 4% cess
|Above Rs. 50 lakhs to Rs. 1 crore
|30% + 10% surcharge + 4% cess
|Above Rs. 1 crore
|30% +15% surcharge + 4% cess
Points to Keep in Mind Regarding Tax Benefit on Personal Loan
- When you take a personal loan, it is not taxable as the amount received on loan is not considered as an income.
- In order to be eligible for claiming a tax deduction on the interest paid on your personal loan, you must submit adequate-proof to income tax authorities to support your claim in the form of a bank certificate or auditor’s certificate.
- If you want to claim tax benefit on a personal loan, you should keep a copy of all the important documents like sanction letter, expense vouchers, auditor’s report and bank certificate, you might need to submit them to income tax authorities for assessment.
- Banks generally check your repayment track record while approving the personal loan. Hence, it is essential that you maintain a good repayment track record with respect to loans and credit card bills. Amongst other considerations, you must check for the quantum of the loan amount, flexibility on repayments of the loan and faster processing of the personal loan.
Though personal loans are not tax-saving instruments directly, you are eligible for tax deductions based on the purpose of usage. Make sure to understand all the taxation rules regarding personal loans and enjoy tax benefits, if applicable in your situation.