1 min read
25 May 2021

Personal loans are an easy method to avail of finance for various purposes. Whether you need to fund your higher education, tackle an emergency medical situation, or plan your dream wedding, a personal loan can come to your aid.

Since personal loans are unsecured loans, you don’t need to pledge any collateral to avail the funding. As a result, personal loan interest rates are often higher than those for secured loans. However, they are also a more easily accessible source of funds to salaried and self-employed individuals than other types of loans.

Is the personal loan amount taxable?

Generally, personal loans are not taxable since the loan amount is not considered part of your income when filing income tax returns. This means that you won’t need to pay any income tax on personal loans. However, it should be noted that the loan has to be availed from a good source, like a bank or another financial institution, as loans from unknown sources might be considered as part of your income.

Tax benefits with personal loans

Personal loan do come with tax benefits, depending on the end-use of the loan amount. The Indian Income Tax Act allows tax deductions on personal loans for specific purposes as discussed below.

A personal loan does not have any special tax advantages. However, there are a few circumstances that you can use to your advantage when taking out a personal loan in India. The intended use of the loan amount is the main consideration for deciding whether you are eligible to receive these advantages. If you can show that the money was utilised for that precise purpose, you are eligible to receive these benefits.

Renovation of the home: In accordance with the Income Tax Act, you are entitled to a tax deduction if you borrow money to renovate your home or repair your home.

Purchase a home or construct a home: If you borrow money to buy or build a home, you can deduct the interest you paid on the loan. You may deduct interest up to a certain limit if the home is used for personal use. The entire interest payment is deductible from your taxes if you rent it out.

Education costs: You can claim tax deductions if you take out a personal loan to pay for your own education, that of your spouse, or that of your children. For a maximum of eight years, or until the debt is repaid, whichever comes first, this deduction may be used.

Starting a business: As per the Income Tax Act, you may be allowed to deduct the interest paid on a personal loan taken out to launch or invest in a business.

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Frequently asked questions

Is personal loan eligible for tax exemption?

Personal loans are generally not eligible for tax exemption in most cases. Unlike specific loans like home loans or education loans, personal loans do not typically offer tax benefits. Tax regulations may vary, so it's advisable to consult a tax professional for the latest information based on your location.

Can I claim tax relief on personal loan interest?

In most cases, interest on personal loans is not eligible for tax relief. Unlike certain loans like home loans or education loans that may offer tax benefits, personal loans are usually not considered for tax deductions. It's crucial to check local tax laws and consult a tax professional for the latest information.

Which loan is exempt from tax?

Home loans often provide tax benefits on both principal repayment and interest. Education loans can also offer deductions on interest paid. However, tax laws vary, so consult with a tax professional for the latest information in your jurisdiction.

Can I get personal loan based on ITR?

Yes, some lenders provide personal loan based on your Income Tax Return (ITR). Lenders may consider your ITR as proof of income and financial stability. A good credit score, stable income, and a positive ITR can increase your chances of approval and potentially lead to favourable loan terms.

Who is eligible for ITR loan?

Individuals with a consistent income source and who file Income Tax Returns (ITR) are typically eligible for ITR-based loans. Lenders often assess the ITR as proof of income and financial stability. A good credit score and a positive ITR record enhance eligibility, leading to favourable loan terms and approval.

Which interest is exempt under income tax?

Interest earned on certain investments like Public Provident Fund (PPF), tax-saving fixed deposits, and specific government savings schemes may be exempt under income tax in some jurisdictions. However, the tax rules vary, so it's crucial to check the specific regulations applicable in your country for accurate information.

Can I get a personal loan without ITR or salary slip?

It is challenging to get a personal loan without Income Tax Returns (ITR) or salary slips, as these documents verify your income stability. Lenders typically require proof of income to assess repayment capacity. If these documents are unavailable, you may explore alternative options or consider lenders that offer loans based on other criteria.

Can someone apply for a personal loan without income proof?

Yes, an unemployed person can apply for a personal loan, but approval depends on factors like credit history, alternative income sources, and the lender's policies. Some lenders offer personal loans for self-employed, and personal loans for students with no income proof as well.

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