It is only when we start earning that the fuss about tax saving begins. The very moment we get our paycheque and see the taxed amount, we realize the importance of effective tax planning. While there are many ways to reduce your tax burden, most of us often fail to take advantage of all the tax-saving avenues available. More often, even the most experienced professionals lack awareness beyond Section 80C.
Take for example the case of tax benefits on a personal loan. Did you know that generally, personal loans are not at all taxable? This is because the loan amount is not accounted for as a part of your income while filing your income tax return. However, you must ensure that you avail the loan from a legal source such as a bank or other financial institutes or loan apps such as EarlySalary loan app. In this blog, we break down some myths and tell you how you can claim tax benefits while availing a personal loan.
When Can I take Tax Deductions on Personal Loan?
A personal loan is a multipurpose loan that can be used to finance some of the most important milestones in your life, right from marriage to a new venture. One common myth about it is that the interest paid on personal loans is not tax-deductible.
However, under some circumstances, you can avail of tax benefits even on a personal loan. The caveat here is the purpose towards which the personal loan is utilized. The IT Act allows tax benefits in these 3 cases:
- Personal Loan for Purchase, Construction or Renovation of Residential Property
You can get tax deductions under Section 24 on personal loans if the amount is used to purchase, build, or renovate your home. Interest accrued from the borrowed capital is deductible from your net income or net annual value of the property for which the amount is used.
You can also claim tax benefits up to Rs 2 lakh on personal loan taken for a self-owned property. The entire interest amount can be claimed as a deduction for a personal loan towards a rented home. The principal amount of personal loans for home improvement is also eligible for a tax deduction of up to Rs 1,50,000 under Section 80C.
- Personal Loan for Investing in your Business
While there are dedicated debt funds available for growth financing of your business, you can also opt for a personal loan for your business requirements. You can claim tax benefits by deducting the interest paid from gross revenue i.e. the net taxable profit from the business. This is called a tax shield as this interest will be considered as a business expense and the exemption limit is not defined.
- Personal Loan for Asset Acquisition
If you use the personal loan amount for incoming-producing assets such as shares or gold, then also you can get tax benefits. At the time of selling such assets, the interest amount included in asset acquisition lowers your capital gains, thereby reducing your capital gains tax liability on the sale transaction.
Yes, you can claim tax benefits while availing a personal loan. As you can see, there is more to tax savings.
However, a word of caution here. Don’t take a personal loan just to claim tax benefits. You should also ensure that you have all the relevant documents such as the sanction letter, expense vouchers, authorized certificate from your bank, auditor’s report, and the lender certificate as proof to be able to claim your deduction on a personal loan.
If you want an instant personal loan, opt for an online personal loan through the EarlySalary app to make sure you make the best possible use of all the options available. Attractive interest rate, instant approval, and hassle-free disbursement, EarlySalary instant personal loan app has it all and more.
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