The Income Tax Act allows several tax deductions on interest and principal repayments for education and home loans. However, tax deductions are not common for personal loans. But you can claim deductions on interest payments of personal loans in special cases. This mainly depends on the purpose of your taking the loan. It would be best if you met specific criteria to qualify for those deductions. There are various types of Personal Loans:
Types of personal loan
The following is the list of the types of personal loan available in India:
- Wedding loan
- Vacation loan
- Festival loan
- Home renovation loan
- Consumer durables loan
- Top -up loan
- Personal computer loan
Personal Loans used for Business Purposes
When a personal loan has been invested in your business, the interest paid can be claimed as a business expense. This will bring down the tax liability of the borrower and reduce the net taxable profits of the business that they have invested in. There is no cap on the amount that can be claimed in this case.
Personal Loans used for Purchasing or Constructing Residential Property
One can avail tax benefits from their personal loan if they have used the personal loan money for the purchase or construction of a residential property. The borrower can avail tax benefits for repayment of interest for the same under Section 24 of the Income Tax Act, 1961. There is no cap on the maximum amount that can be claimed if the house has been rented out to someone else. However maximum loss that can be claimed under the head House Property is Rs. 2,00,000. It is important that the borrower be the owner of the property in order to avail tax benefits.
Under section 24(b) of the Income Tax Act, tax deductions on the interest paid may be made if the personal loan amount is used to finance a down payment on a home or renovations.
You need to submit a certificate issued by your credit provider, mostly banks, certifying the loan was utilized for this purpose.
Personal Loans used for Purchasing Any Asset
The interest paid on a personal loan used to purchase assets such as securities, jewellery, or non-residential properties is not technically a tax-deductible expense. However, the personal loan used to buy shares, jewellery or non-residential property can also provide tax benefits since the interest paid adds to the acquisition cost. This leads to reduced capital gains tax upon sale.
The interest paid raises the cost of acquisition when borrowed funds are used for commercial endeavors or the purchase of assets. Because of this, the capital gains are lower, which lowers the tax bill.
Despite the Income Tax Act not clearly stating tax-deductions on personal loans, you can still avail tax benefits on them. The reason why you took the loan is the major consideration when granting tax deductions only on interest payments on personal loans, never the principal amount. To conclude, you can avail tax deductions if you use the personal loan amount for purposes that come with tax benefits. Always make sure you understand the specifics of the loan you opt for before zeroing in.