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, you don’t need to pledge any collateral to avail of 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 for salaried and self-employed individuals than other types of loans. Additionally, in certain cases, you may be eligible for a tax benefit on a personal loan, particularly if the loan is used for home renovation or business purposes. Understanding the criteria for personal loan tax exemption can help you maximise savings while managing your finances efficiently.
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 benefit on personal loan
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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