Loans help us in achieving such goals in life which face financial hiccups. Even then, they are ultimately a financial burden for us. Government understands the strain these loans put on us and therefore it offers monetary relief in the form of tax deductions. Several loans like education loan, home loan, business loan etc. are eligible for tax deduction. However, there is no specific provision in the Income Tax Act about tax deduction on Personal Loan. This gives rise to the question that how can one get tax deduction on Personal Loan?
Use of Personal Loan is flexible, so deduction is given on Personal Loan on the basis of the purpose for which the loan is taken. If the purpose for which Personal Loan is availed qualifies for tax deduction then deduction will be allowed otherwise not allowed. Below we can see some cases under which a borrower can get tax deduction.
Amount received from a Personal Loan can be invested in business. If such an investment is made then one can claim its interest payment as deduction. This brings down the net taxable profit which results in reduction of tax liability. The best part of such investment is that there is no maximum limit for the amount which can claimed as deduction.
If the Personal Loan is used for the construction or purchase of a house then one can avail tax deduction under section 24. However, you must be able to prove that the amount was actually spent on purchase or construction of your house. The maximum amount of deduction allowed in this case is Rs. 2,00,000 for Self-occupied house. However, there is no maximum limit if the amount has been invested in a house which has been given on Rent or has been deemed as let-out.
If the personal loan has been taken for the purchase of any asset like Shares, Jewelry, Non-Residential House etc., the amount of interest paid on such loan would be added to the cost of acquisition of the asset.
Tax benefit for this cannot be claimed for the year in which interest is paid but in
Deduction for this won’t be allowed immediately in the year in which the interest has been paid but would be added to the Cost of Acquisition and Tax Benefit would be allowed in the year in which such an asset has been sold. This will increase the Cost of Acquisition and in-turn reduces the Capital Gains which would arise on the sale of such an Asset.
In all the above mentioned cases, Deduction would be allowed for the Interest component of Personal Loan. The deduction would not be allowed for the repayment of the principal component but would only be allowed for the repayment of the interest component.
If the amount raised through a personal loan has been used for any other purpose, then no income tax benefit would be allowed for the same.
1) When you raise an amount through personal loan, it is not taxable in your hands because it is not considered an income but loan.
2) To claim deduction in any of the above mentioned cases, you must have proper evidence or proof to support your claim.
3) To claim Income Tax Benefits for a Personal Loan, you should keep a copy of all important documents like the amount of loan taken, amount and interest to be repaid and all other relevant documents.