Taxpayers can claim certain tax deductions on both education and home loans. However, what is not common knowledge is that you can avail tax benefits on a personal loan as well.
A personal loan is more of a utility loan, simply because of the range of purposes, it can finance – be it used for debt consolidation, funding the annual family vacation, financing a home renovation or meeting the education expenses of your child. However, what you might not know is that a personal loan has other goodies for the common taxpayer as well.
Since income tax deductions in case of a personal loan aren’t categorically mentioned under the Income Tax Act, 1961, the reason for availing such a loan becomes an important consideration in the first place. An unsecured personalloan will qualify for tax relief, given it meets certain conditions and is being used for financing a few specific objectives.
Discussed below are the three possible situations wherein a personal loan qualifies for tax benefits:
1) For investment in business
If you avail a loan for the objective of investing it into your business, you will be able to claim the accrued interest as business expenditure. This lowers your tax liability while reducing the business’s net taxable profits. There is no upper limit on the amount that qualifies for personal loan tax deductions.
2) For investment in other assets
In case the personal loan has been invested in other assets (other than residential property) such as jewelry, shares, specific stocks or non-residential property, the interest paid will qualify for tax deductions. However, while you will not be able to claim such deductions during the year of payment of the interest, it will get added to the total cost of acquisition of the asset and will ultimately be eligible for tax benefits the year you decide you sell the particular asset.
3) For investment in a residential property (either purchase or construction)
The last circumstance wherein a personal loan qualifies for tax deductions is when you invest the loan in either buying or constructing a residential property. In such a situation, you can claim the interest paid as a deduction under Section 24 of the IT Act, 1961. In case the property is self-occupied, the maximum amount that currently qualifies for exemptions is Rs.2,00,000. This amount is calculated on a proportionate interest basis (1/5th of the interests, both pre-acquisition, and post-possession).
In case the property has been rented out, there will be no upper limit on the amount you claim as an exemption. However, it is imperative that the borrower of such a personal loan be the owner of that property in order to enjoy tax benefits.
You can check your personal loan eligibility via eligibility calculator. Some lenders offer high amounts subject to competitive personal loan interest rates. For example, NBFCs sanctions up to as much as Rs.25 lakhs, spread over a flexible tenor ranging from 12-60 months, with money in the bank guarantee within 24 hours.