How To Get Tax Benefit On Personal Loan?

Many of us avail a personal loan when we need financial assistance to achieve important milestones like funding higher education, starting a business, etc. or to fund any emergency medical treatments. 

In most cases, the interest paid on personal loans are not tax deductible as the personal loan amount is not considered as a part of your income. However, you can receive tax benefits on your personal loan under certain circumstances, based on what you utilise the loan amount for. Under the Income Tax Act of 1961, you can claim tax benefits on personal loan in the following cases: 

Personal Loan Taken For Home Purchase And/Or Renovation

We tend to carry out renovations in our home at regular intervals to ensure that it is in a good condition. Availing a personal loan can help you arrange the necessary funds for such renovations. Moreover, under the provisions provided by Section 24(b) of the Income Tax Act, you are eligible to claim a tax deduction on the interest payable on the personal loan if you use the loan amount to renovate your home. You can also claim personal loan tax benefits under this section if you use your personal loan amount to purchase/build your home.  

When you avail a personal loan for either of the above-mentioned purposes, the interest paid can be deducted from your net taxable income or the net annual value of your property. For a self-owned property, you can get a tax benefit of up to ₹2,00,000. 

Personal Loan For Investing In A Business 

Some of us opt for a personal loan to set up and grow our business. If you invest your personal loan amount into your business, the interest paid on this personal loan will be considered a business expense and hence can be deducted from your gross revenue. This reduces your overall tax liability. You must note that there is no upper limit for the tax benefit amount you can claim under this category. 

Personal Loan For Investments 

If you use a personal loan to invest in income-producing assets like shares, gold, etc., you can claim personal loan tax benefits. However, you cannot claim a tax benefit on the personal loan interest amount right away. The interest on the personal loan amount used to invest in an asset gets added to the cost of acquiring the asset, thereby lowering your total profit. This reduces the tax payable on the gains when the asset is sold.

The amount borrowed as a personal loan is not taxable as it is not part of your income. However, this is valid only if you avail the loan from a secure and reliable source. To support your claim while availing personal loan tax benefits, you will have to submit sufficient proof to the income tax department. Hence, ensure that you have all the personal loan related documents readily available to avoid any inconveniences later on.  

Also Read: What Is Section 80C Under the Income Tax Act? Investment Options Explained