If you have been planning to get a personal loan for some time now, one common thought that must have pondered your mind is the fact that will you be able to claim tax benefits on taking a personal loan? And you are not alone; thousands of people who research about personal loans every year tend to ask this same question, and thus the answer is worth noting.
Thus in today’s article, we will tell you exactly if you can claim a tax benefit on a personal loan. So without any further ado, let’s get started.
One of the first and most important aspects you need to understand is the meaning of a personal loan. In simple words, you can understand a personal loan being a financial instrument through which you can borrow a certain amount, usually between ₹10,000 to ₹500,000 at a low rate of interest, along with a flexible repayment plan.
Compared to traditional loans in the market, personal loans come with a variety of features and benefits. Some of the most significant ones are as mentioned below.
Easy Access: One of the first and biggest advantages of a personal loan is the fact that it is widely available and easily accessible. Although the concept of a personal loan is not exactly new in India, in recent times, more consumers are becoming aware of it, leading to increased demand among consumers.
Online Process: Whenever you approach a lender for a traditional loan, chances are that you will need to go through an offline application process in order to apply for the loan. This can include everything from filling out the application form in the lender’s office all the way to submitting hard copies of your documents, like your PAN Card, Aadhar Card, and other KYC documents. On the other hand, most personal loans in India come with a completely online application process. If you want to take a personal loan, all you need to do is either visit the official website of the lender or download the smartphone application. Once these steps are complete, you need to enter your registered phone number to start the process, followed by sharing your PAN card number and Aadhar number to start the eKYC process. Since the process is completely online, you can complete it right from the comfort of your home and receive the amount in your bank account within the next 24 to 48 hours.
Flexible Repayment Plans: One of the most widely regarded disadvantages of a traditional loan lies in the fact that they have fixed repayment schedules, meaning that there is a fixed date every month when you need to pay a fixed amount as EMI. On the other hand, most personal loans in India come with a flexible repayment plan wherein you, as the borrower, get to decide both the amount you are going to repay along with the date on which you will repay the amount. This process of repayment comes with two main advantages; the first is, since you can decide on the date on which you want to repay the amount, you will have much more flexibility and simultaneously reduce your overall financial stress, and the second is, since you get to decide on the date on which you want to repay the amount, you can customize it to a date which suits your specific needs and requirements. And since both these advantages are missing from a standard loan process, most borrowers find personal loans to be much more attractive as compared to traditional loans.
Low Rates of Interest: Last but not least, personal loans in India come with one of the lowest rates of interest. As compared to traditional loans in the market, which come with an interest rate of about 10% to 36% depending on the purpose you choose, personal loans have an interest rate of 1.13%. Not only does this low rate of interest reduce the overall financial strain of the loan on the borrower, but it also makes sure that more people can easily access it.
Now that you know about the basics of personal loans, the obvious question that might be pondering your mind is, what are the tax implications of taking a personal loan?
Well, in short, the tax implications and tax benefits of a personal loan will vary depending upon the purpose you choose to use the loan.
Generally speaking, most types of personal loans available in India are nontaxable, with the reason being that the amount of loan you take is not calculated as a part of the borrower’s income and thus, when you file for your taxes, you do not need to mention them as an income source. However, you do need to keep in mind that whenever you take a personal loan, you need to verify its legitimacy as unconventional sources night land you in legal problems.
Most personal loans in India are nontaxable and they do come with several tax benefits. The Income Tax Act of India rules that depending on the purpose you use a personal loan for, it’s tax benefits will be decided. For example, if you use a personal loan either for establishing a business or expanding an existing one, the loan amount will be nontaxable while at the same time attracting benefits for its use.
One of the most common purposes for which borrowers take a personal loan is to either buy a house, construct a new house, or renovate an existing one. If you are planning to take a personal loan for any of these purposes, the interest you will pay on the loan will be nontaxable according to section 24 of the Income Tax Act of India.
However, one of the most important aspects to remember is the fact that if you do not have proper documentation to prove that you used the personal loan amount for the above-mentioned purposes, you will not qualify for the exemption.
Depending on the loan amount you avail, the deduction can go upto ₹2 lakhs for a self-owned home.
The second most common aspect for which most borrowers take a personal loan is to invest in their business ventures or to purchase additional assets. In this scenario, if you use the loan amount to either start a new business, expand the existing business, or purpose any other asset, then the interest amount you will pay on the personal loan will get added to the cost of acquisition, thus making it nontaxable.
Along with this, since in this category, you are essentially using a personal loan for increasing your assets, taking a personal loan will reduce your capital gain liability and thus reduce the other taxes you are liable to pay.
Taking a personal loan in India of 2020 has become easier than ever before, thanks to the numerous lenders who now specialize in this domain. Now that you know of all the features of a personal loan, along with the tax benefits and deductions it arrives with, go ahead and apply for a personal loan today. All the best.