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

As the name suggests, personal loans are available to meet one’s personal financial needs, be it for home renovation, investing in a business, dealing with an emergency medical situation, or covering the expenses of a wedding.  

These loans are unsecured, meaning that they don't require collateral. Therefore, they come at a comparatively higher interest rate. Additionally, personal loans usually have a short repayment term and low eligibility criteria, making them easy to obtain. Many individuals question whether there are any tax benefits associated with personal loans, and in this article, we'll address that query.

Tax Benefit On Personal Loan

No, there are no specific tax benefits on a personal loan. However, we have identified a few scenarios where you can claim tax benefits on a personal loan in India. 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.

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. 

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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