The tax season is upon us, and it's time to get all the paperwork related to your income, expenses and assets sorted. If you have taken a personal loan, you might be wondering whether it is taxable and whether you should declare it on your income tax.
In most cases, personal loans do not come under taxable income as the loan amount is not considered a part of your income. However, these loans do carry tax benefits under certain conditions.
Read on to find out more about personal loans, their benefits, and if they are considered taxable income.
What is taxable income?
Simply put, any income that you earn during the tax year in the form of salaries, business income, investment income, capital gains, pension, and more is potentially taxable income. It is the base amount on which the government imposes taxes under the income tax system.
However, not all earnings are taxable. Your taxable income is determined by taking the total earnings minus the exemptions and deductions for which provisions are provided in the law.
A few examples of earnings on which you don't need to pay tax include:
1. Income through agriculture
Any income you earn through agriculture is not taxable.
2. Money received as gifts
If you receive any gift from your relatives, it's not taxable. In addition to this, a wedding gift is also non-taxable.
3. Money obtained through insurance
Any money you receive through a life insurance policy does not come under taxable income.
4. Gratuity pay
Any income you receive through gratuity pay is completely non-taxable (if you're a government employee) or partially taxable (if you're a private sector employee).
5. Provident fund (PF) income
The money you receive from PF on retirement is not taxable.
6. Receipts from Hindu Undivided Family
Under section 10(2) of the ITA, any amount you receive or inherit as a member of the Hindu Undivided Family (HUF) is exempted from tax payments.
7. Shares from partnership firm
Any share in the profits of the partnership firm is exempt from income tax in the hands of the partner. However, any funds you receive other than the share of profits as a partner, such as interest or remuneration, are taxable.
8. Scholarships and rewards
Scholarships and rewards received from government, private or other institutions do not come under taxable income.
9. Money earned through interest
If you have a fixed deposit, the interest earned on it is not taxable up to Rs. 10,000. Interest from several other deposits, like gold deposit bonds, is also not taxable.
10. Income through pension
Income earned through a pension is non-taxable for certain groups such as armed forces, gallantry award winners, etc.
11. Select allowances in salary
Depending on your employer, specific allowances, such as house rent allowance, travel allowance, academic allowance, etc., are deducted from your income when calculating taxes.
What is a personal loan?
A personal loan is a multi-purpose loan that can be used to meet various financial obligations like repairing your home, a medical emergency, a wedding, and more.
Personal loans are unsecured loans, which means they do not require any collateral and feature competitive interest rates. The interest rate on your personal loan depends on multiple factors, like your credit score, your monthly income, place of work, any prior loan defaults, age, and so on.
Is a personal loan considered taxable income?
A personal loan is not considered a part of your income. You take a personal loan to meet your financial needs with the intent of paying it back. Since you're not making any money through these loans, it is not considered as income and hence is not taxable.
However, a personal loan taken from unknown sources other than a financial institution might be considered a part of your income and become taxable.
Moreover, personal loans also carry certain tax benefits depending on their end-use, allowing you to claim tax deductions and save funds.
Tax benefits on a personal loan
There are some provisions that depend on the end use of the loan and when a personal loan can become tax deductible. This means you can subtract the loan or interest amount from your gross income, thereby reducing your taxable income.
1. Home renovation
If you take a personal loan for home renovations or repairs, you are eligible for tax deduction under the Income Tax Act.
2. Starting a business
If you use your personal loan to start a business venture, the interest paid on the loan becomes tax deductible.
3. Education
You can also claim tax deductions if you use your personal loan to pay for your or your spouse's or children's education.
4. Home purchase
If you purchase a home from your personal loan, you can claim a partial tax deduction on the interest paid on the loan. In case the home is rented out, the entire interest paid can be claimed as a tax deduction.
Benefits of applying for a personal loan
1. Multi-purpose use
While a home loan or a car loan can only be used for specific purposes, there is no such constraint on a personal loan. You can utilise the funds for various purposes and make sure to meet your financial needs in time.
2. No collateral
Since personal loans are unsecured, you do not require any collateral to apply for a personal loan. This makes the loan application and disbursal process quick and easy.
3. Instant disbursal
Compared to other loans, the loan disbursal process for a personal loan is quick due to minimal documentation and no collateral requirements. This allows you to access the funds quickly in case of an emergency.
4. Minimal documentation
You can apply for a personal loan by submitting your ID proof, address proof and income proof. Minimal documentation is another factor which makes the personal loan application process easy.
5. Flexible repayment
The repayment tenure of a personal loan is usually flexible. You can opt for a tenure of up to 6 years and use the EMI calculator to determine the EMI payments depending on your finances. With flexible repayment, you can manage your finances better.
6. Hassle-free application
The personal loan application process is easy and hassle-free. You can apply for a personal loan online from an app, a website or offline by visiting the branch.
Looking for a personal loan?
If you're in urgent need of funds, try Tata Capital's personal loans. Tata Capital provides instant personal loans with attractive interest rates. Determine your repayment plan using Tata Capital's personal loan EMI calculator online.
To find out more, visit the Tata Capital website or download the Tata Capital App now!
24 April 2024
6 mins read
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