Tax Benefit On Personal Loan: How To Avail Income Tax Benefits On Personal Loan?

You can claim deduction against a personal loan interest and principal repayment in cases like home loan, vehicle loan, education loan, etc. However, the eligibility to claim such deduction depends on various factors like the regime chosen, and satisfaction of other criteria mentioned in the act.

Tax Benefit On Personal Loan

The key factor in determining whether you can claim these benefits is the intended use of the loan amount. You can claim these benefits as long as you can provide evidence that the funds were used for that specific purpose.

Home Renovation

If you take a personal loan to renovate or repair your home, then you will be eligible for a tax deduction under Section 24(b) of the Income Tax Act. You can claim deductions of up to Rs.30,000 per year on the interest paid on a personal loan. 

Home Purchase or Construction

• If you take a loan for the purchase or construction of a house, you can claim a deduction of the interest paid on such loan. 
• If the house is used for self-occupation, you can claim an interest deduction of up to Rs.2,00,000. 
• However, this limit is reduced to Rs.30,000 if the purchase or construction is not completed within five years from the end of the financial year in which the capital was borrowed. 
• If you let it out on rent, then the entire interest amount qualifies for a tax deduction. However, if you opt for new regime then deduction is available only on the property which is let out. 
• Under section 80C, deduction of up to Rs. 1,50,000 in a financial year on principal amount repaid for new house only. 

Education Expenses

• If you take a personal loan to fund the education of yourself,  your spouse, or children, then you can claim tax deductions under Section 80E on the interest component. 
• This deduction can be claimed for a maximum of eight years or until the loan is repaid, whichever is earlier.

Starting a Business

If you take a personal loan to start a business or invest in a business, you may be able to claim the interest paid as a business expense under Section 37 of the Income Tax Act. 

Purchase of an Electric Vehicle

• Under section 80EEB, the deduction of up to Rs. 1,50,000 can be availed against interest on personal subject to condition that loan has been sanctioned by financial institution during the period starting from 1st April, 2019 and ending on 31st March, 2023.
• It is important to note that it is always preferred to take a loan for the same intended purpose, i.e. if you want a loan for education purposes, take an education loan so it will be easier to prove the purpose of the loan without much hassle.

Case Study on Tax Planning Using Loan Funds

One can also plan their financial activities in such a way that they are optimising the taxes also. Here is an example,

Mr. A is planning for the following expenses, and he plans to fund those expenses in the below manner.

In the above example, Mr. A can plan the way he deploys his own and loan funds. He can opt for the purchase of an Electric Car (Deduction eligible u/s 80EEB) and Education cost (Deduction eligible 80E) via Loan funds where he can claim an income tax deduction. He can also prioritise such loans based on interest rates.

He can fund personal expenses like TV, Mobile and other devices using his own funds instead of a personal loan since a personal loan does not carry any tax benefit directly.

Redeployment of funds has helped him to plan and save his taxes more efficiently.

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