Amongst the list of disadvantages as to why one should not opt for personal loans is that there are no tax benefits associated with personal loans. But how true is this statement? Home loans do offer tax benefits, but do personal loans offer them too? Well, before answering that let’s take a look at what personal loans are?
Personal loans are unsecured loans that can be availed to manage monetary deficits of any kind. They are collateral-free loans, which means that you are not required to pledge any asset or have a guarantor to support your loan application (guarantors might be required in some cases). These are usually given out to salaried individuals or to self-employed persons who show stable earnings. Personal loans do not have any specified end-usage associated with them, so you can choose to spend the amount as you wish. These loans have often been known to be used for a variety of purposes such as making emergency medical bills payments, to pay for higher education, marriage costs and even for exotic vacations. Other areas where personal loans have been put to good use include home renovations and debt consolidations.
A personal loan is not considered a part of income and so there is no requirement to file income tax returns on this amount. But be wary about taking loans from unknown sources as these can be considered as part of income and therefore taxable. It is therefore advisable to choose loans from banks or NBFCs. Tax exemptions on personal loans are directly dependent on the end use of the loan. The income tax act of India allows tax deductions on loans that are used for purposes like education, purchase or renovation or construction of property, business expansion etc. So, if the personal loan is used for any of the above purposes and there are validating documents for the same – you can avail tax benefits on your personal loan.
Personal loan for investing in Business
Business invariably requires an influx of funds and when faced with funds shortage, if you have opted for a personal loan then you can use this feature. A personal loan invested in business is deducted from the taxable profits of the company, and thereby reduces the overall tax liability of the business.
Personal loan for purchase or construction of a house
If the personal loan has been used to purchase a property or construct a home, tax benefits on the interest amount can be availed. In accordance with section 24 of the IT Act, one can claim tax exemptions on personal loans that have been used to construct, purchase or even to renovate a real estate property. This amount is limited to a sum of Rs 2 00 000 if you stay in self-owned house while the complete interest paid is exempted in case you stay in a rented accommodation.
Do note that this can be claimed only if there is proper documentation proof available. Any sanction letter, expense vouchers, auditor’s report or bank certificates that can be used to back your claim with the IT department must be carefully preserved.
Personal loan for investing in assets like shares, jewelry, bond etc.
An Instant personal loan used for investment in assets like shares, non- residential house, bonds or jewelry can be considered for tax exemption. However, this amount is added to the total cost incurred while purchasing the asset. This means that the tax benefit cannot be availed during the year of purchasing the asset and is made available only upon the sale of the same.