According to a report presented by Money Tap, growth in personal loans was found to be 20.4% between February 2017 and February 2018. By the end of the financial year 2018, the total amount of unsecured loans borrowed by financial companies stood at $82 billion. Such a substantial amount of personal loans borrowed by customers show the rising popularity of unsecured loans and the preference of borrowers to avail such loans and meet their various financial requirements.
Despite the huge popularity of personal loans, few borrowers are yet to know how to claim tax benefits on personal loans.
Even though personal loans do not directly offer tax exemptions, borrowers can still claim benefits if they utilise the amount borrowed for specific reasons.
When can you avail tax benefits on a personal loan?
If borrowers utilise the funds availed from personal loans for any of the below-mentioned uses, they are entitled to tax benefits.
- Home improvement
Under section 80C of the Income Tax Act, individuals who have availed personal loans for home improvement can claim tax exemptions of up to Rs.1.5 lakh equal to the loan principal repaid for one financial year.
- Investment in business
Individuals acquiring a personal loan for business purposes can claim the interest paid as tax exemptions. There is no maximum limit defined for how much interest can be claimed as personal loan tax benefits under this exemption. Note that the funds are to be used for business-related expenses and requisite proof may also be needed to successfully avail the claims.
- Purchasing/ constructing a property
As per section 24(B) of the Income Tax Act, personal loan borrowers who have utilised the funds for construction, purchase, and renovation of residential properties or houses can avail tax benefits equal to the interest repaid till up to Rs.2 lakh. Note that, to be eligible for these personal loan tax benefits, the borrower has to be the owner of the property in construction or renovation. In case the borrower of the personal loan resides at that particular property, the above-mentioned tax exemption slabs duly apply. However, in case the property is put out on rent, there are no such slabs applicable on the tax benefits.
- Purchase of assets
In this case, if the individual/borrower has invested the borrowed amount for purchase of the asset, e.g. a non-residential property, jewellery, shares, stocks, etc. However, the personal loan tax exemption won’t be valid for the year when the interest is paid; rather, it is added to the cost of acquisition of assets.
Above mentioned are some conditions when the answer to ‘is personal loan taxable’ is yes. Consequently, individuals utilising the personal loans for any such purposes are eligible for tax benefits.
Non-banking financial companies like Bajaj Finserv simplify the loan application procedure by introducing pre-approved offers for existing customers. Such offers are available on several secured as well as unsecured financial products such as personal loans, business loans, home loans, etc. Customers can check out pre-approved personal loan offers within seconds by inputting the name and contact number.
Pointers to keep in mind regarding tax benefits
- Personal loans aren’t directly taxable, and hence borrowers have to provide substantial proof to the Income Tax Department of India supporting their claims. The prooft be produced can be a certificate issued by a financial institution or auditor’s certificate.
- Borrowers will have to produce proof of the expenses made, whether it is for a business venture or construction/ repair of a property. Therefore, loan sanction letter, auditor’s certificate, a certificate issued by a financial company, expenses bills, and vouchers are to be produced.
Subsequently, individuals will be able to avail tax benefits on personal loans if they utilise the funds for any of these purposes and have valid proof supporting their claim.