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3 Possible Cases you can avail Tax Benefits on Personal Loan



Instant personal loans can indeed be your friends in trying times. Be it funding your vacation or gathering extra amount for acquiring real estate assets; personal loans can be your go-to as they generally don’t require any collateral. 

It is common knowledge that both education and home loans are capable of availing tax reductions and exemptions. However, were you aware that there are various tax benefits on personal loan as well? 

What may seem too right to be true is a reality, but just like anything else, some critical factors determine whether the personal loan you avail is eligible for tax benefits. To make it easier for you, we have compiled the three possible scenarios where you can avail of tax benefits on a personal loan.  

Before that, do note that the deduction is subjected to only the interest component of your personal loan and not the principal component. And use the personal loan amount for any other purpose other than the three cases listed below. You will automatically be ineligible for any tax benefits on personal loans. 

You will also need to keep the following documents ready to claim the tax benefits on loan. 

  • Expense vouchers
  • Sanction letter
  • Lender certificate
  • Auditor’s reports 

Let’s take a look at the three feasible cases in which you can avail tax benefits on your personal loan. 

1. Investment in Business 

If you use the sanctioned personal loan amount as an investment for your business, then the interest amount you pay for the loan can be claimed as an expense. By doing so, your tax liabilities will be significantly reduced, and the net taxable profits of the business you have invested in will be cut down. 

Also, the income-tax act hasn’t set any cap on the amount that can be claimed in this scenario. This means that the entire interest paid can be tax-deductible if invested in your business. If you’d like to know an estimated amount you are eligible for, use an online personal loan calculator

2. Investment in Assets 

Another scenario in which you will be eligible for availing tax deductions under personal loans is if you use the loan amount for purchasing assets such as non-residential property, jewelry, or shares (mutual funds and particular stocks). 

However, you won’t be eligible for tax benefits in the same year you paid the loan interests. Instead, the interest you paid will be added to the total cost of acquiring the asset. And once you sell your asset, you can claim tax benefits in a particular year. 

As the interest will be added along with the cost of acquisition, the capital gains on selling your assets will be reduced, which in turn will reduce the tax liability associated. Also, there isn’t any maximum amount limit for a tax deduction in this case. 

3. Investment for the Construction or Purchase of Residential Property 

Another way you can avail tax benefits on a personal loan is if you have used the amount for purchasing or constructing a residential property. Under Section 24 of the Income Tax Act, 1961, you can avail of tax benefits for the repayment of interest.  

The maximum amount that can be reduced as a tax deduction for a house occupied by yourself is Rs. 2,00,000 in a financial year. And as expected, the borrower must be the owner of the property to avail of tax benefits.  

However, if you have rented the property to someone else, there isn’t any limitation to the amount that can be reduced as a tax deduction. Do note that the borrower should produce the required documents that prove the use of the loan amount for repairing, constructing, or buying a residential property. 

Likewise, under Section 80C of the Income Tax Act, the personal loan amount used for home improvements is tax-deductible for up to Rs. 1,50,000 in a financial year. You can use a personal loan calculator online to know the amount you are eligible for based on your financial situation. 

To Conclude,

These are the three ways you can avail tax benefits on a personal loan. Visit Fullerton India to apply online for a personal loan and get instant approval with minimum documentation. 

Niraj Jaiswal is an experienced financial analyst, researcher & writer. I have done MBA in Finance. I have worked extensively in the finance sector along with many organizations. I spend most of my time on the Internet reading finance related stuff and love to share my expertise with readers.

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