A personal loan is a convenient way to arrange quick funds for all your financial needs. Whether you want to pay medical bills, finance your travel plans, plan a wedding, or sponsor your child’s education, a loan for personal use will have you covered! 

Not to mention, these multipurpose and quickly disbursed loans have yet another advantage: you can claim tax benefits on them under certain conditions. 

While there aren’t any special provisions for such loans under the ITA, tax-deduction is allowed if you use your loan amount for:

  • Investing in a business
  • Purchasing, constructing, or renovating a residential property
  • Investing in assets

Let us explore how you can claim tax deductions in these three cases. 

#1 Investing in a business

If you invest your loan amount in a business, you avail of personal loan tax benefits by claiming the interest paid as expenses. By doing so, you can reduce your tax liability and the net taxable profits of the business you have invested in. However, the deduction is only applicable on secured business loans. 

Additional Read – How Can a Personal Loan Help Save Tax in 2021

#2 Purchasing, constructing or renovating a residential property

If you have purchased/built a house or renovated your existing property using personal finance, you’re eligible for certain tax deductions.

You can enjoy tax benefits on the repayment of personal loan interest rates under Section 24(b) of the ITA. The maximum deductible amount is Rs. 2,00,000 for a self-occupied house. And there is no upper limit for the amount you can claim if you have rented out your property to someone else. 

While claiming this deduction, however, make sure you keep all the necessary documents handy to prove where the loan amount was used. 

#3 Investment in assets

The third case where you can claim tax deductions on loan for personal use is investing in assets like jewellery, non-residential property, shares, or certain stocks. 

You cannot claim the deduction in the same year in which you have paid the interest. Instead, the interest amount will be added to the cost of the acquisition of your assets. When you sell the asset in the future, you can claim tax deductions from your capital gains, equal to the interest amount. 

Note that this tax deduction will be applicable only on the interest amount and not the principal loan amount. If you want to estimate the interest payable on your loan beforehand, you can use a personal loan EMI calculator online.

Additional Read –Are Education Loans Tax Deductible?

To summarize

If you use your loan amount for any other purpose other than these three, you will not be able to avail yourself of any tax benefits. But if you are eligible for these tax deductions, make sure you take advantage of them and save your hard-earned money from getting taxed. 

Have the benefits convinced you to avail of a loan for personal use? If so, Tata Capital is here for you. With our competitive  interest rates and flexible repayment options, you can fulfil your immediate financial needs. Learn more about our personal loan eligibility criteria.

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