Tax Benefits on Personal Loans

Personal Loans per se are not tax saving instruments unlike home loans or education loans. Personal Loan Tax Exemption benefit can be availed if the loan utilised for the purposes mentioned under Section 24(b) of the Indian Income Tax Act, i.e., for construction of a residential property, for renovation/repair of residential property, for purchase of an asset, or for business purposes.

Tax benefit can be availed if utilised for the purpose mentioned under Section 24(b) of the Indian Income Tax Act. 

Important point for tax benefit on Personal Loan

If you use a personal loan for construction of a residential property, for renovation/repair of residential property, for purchase of an asset, or for business purposes, make sure you have relevant receipts to prove the same. It will help you claim deduction under the Indian Income Tax Act. 
 

Tax exemption under the Indian Income Tax Act allowed for Personal Loans depending upon the end use. It should also be noted that the Personal Loan should be availed through proper channels if you wish to claim tax exemption. Exemption on the interest paid on Personal Loans is available if the loan is utilised for the following purposes:

For the construction of a residential property

If the Personal Loan is used for the construction of residential property, tax exemption can be claimed under Section 24(b) of the Income Tax Act for the interest component of the loan. In case of a let-out property, there is no limit on the quantum of interest which can be claimed as deduction under section 24(b) However, in case of a self- occupied property, the limit is Rs. 2 Lakhs.

For renovation/repairs of existing residential property

If the Personal Loan is used for renovation/repair of the existing residential property then you can claim tax benefit for the interest component on the loan to the extent of Rs. 30,000. For this you will be required to provide necessary documents to prove that the loan is utilised for repairs/renovation of the property.

There is no maximum limit on the quantum of interest which can be claimed as deduction under Section 24(b) if the property is let-out. The limit fixed for claiming the exemption in case of the self-occupied house is Rs. 30,000.

For business purpose

If the proceeds of the Personal Loan are used for business purposes the interest paid towards the loan can be treated as an expense. This can be deducted from the taxable income. The taxable income in business terms is the Company's profit and gross revenue. The interest component of the Personal Loan can be deducted from the Company's net profit. With this the taxable income will be reduced which in-turn will reduce the tax liability. Under this provision there is no limit on the quantum to claim exemption.

If the Personal Loan is utilised for purchase of an asset like shares, jewellery, or non-residential property, the amount of interest paid on the Personal Loan will be added to the cost of acquiring the asset.

The benefit of tax deduction will not be available immediately in the year when the asset is purchased but will be added to the cost of acquiring the asset and the tax benefit will be allowed in the year when the asset is sold. Adding the interest paid on Personal Loan to the cost of acquiring the asset will increase the value of the asset. This will reduce the capital gains liability when the asset is sold. There is no limit on the quantum to claim tax exemption under this provision.

Personal Loans per se are not tax saving instruments unlike Home Loans or education loans. Tax benefit can be availed if the loan utilised for the purposes mentioned under Section 24(b) of the Indian Income Tax Act, i.e., for construction of a residential property, for renovation/repair of residential property, for purchase of an asset, or for business purposes.

Tax benefit can be availed if utilised for the purpose mentioned under Section 24(b) of the Indian Income Tax Act.