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Tax Benefit on Personal Loan: How to Claim

Updated on: 16 Jan, 2024 05:49 PM

People often seek personal loans for diverse needs like weddings, home improvements, or education. Understanding the tax implications of these loans is crucial for informed financial planning. This brief guide explores the tax benefits on personal loans, shedding light on exemptions and deductions. Whether funding a home renovation, education, or starting a business, knowing how tax benefits apply can significantly impact individuals.

Contents

What are Personal Loans?

A personal loan is a type of loan in which an individual can borrow some amount of money for different types of purposes. This personal loan can be used for purposes like weddings, home renovations, debt consolidation, or other personal expenses. Credit unions, banks, and online lenders can offer these personal loans.

A personal loan can be unsecured or secured. In secured personal loans, the borrower has to provide collateral to borrow money. Similarly, unsecured personal loans are not required to provide any collateral for borrowing money.

Is the Personal Loan Amount Taxable?

The personal loan amount is generally not taxable as the loan borrowed for meeting personal expenses is not considered a part of the individual’s income at the time of filing ITR. In other words, you don’t have to pay any tax on personal loans. However, if the loan has been obtained from invalid sources or sources not recognized by the government, it can be treated as income and charged to tax.

What are the Tax Benefits Available on Personal Loans?

Taking personal loans comes with a lot of tax benefits on the basis of the end-use of the loan amount. Below are the specific purposes for which a loan on personal tax is exempt.

Personal loans do not have any special tax advantages. However, the below-mentioned conditions can be used to avail of tax benefits on personal loans.

  • Renovation of Home: You can claim a deduction from tax if you have borrowed the amount of money for the renovation, repair, or maintenance of the house. You can claim this deduction u/s 24(b) of the Income Tax Act upto Rs.30,000 per year on the interest paid.
  • Purchase or Construction of a Home: If you have borrowed money or taken out a loan for purchasing or constructing a home, you can claim interest paid on the home loan as a deduction. If the house is used for yourself, then you can claim a deduction of interest upto Rs.2,00,000. If you let it out, then the entire amount of interest can be claimed as a deduction.
  • Education Costs: If you have taken a personal loan to fund either your or your spouse's or children’s education, then you can claim a deduction on the same under section 80E of the Income Tax Act. You can claim this deduction for a maximum of 8 years until the loan is repaid, whichever is earlier.
  • Starting a Business: On a business loan taken for the purpose of starting a new business or investing in a business, you can claim a deduction of the interest paid as it forms part of a business expense under section 37 of the Income Tax Act.

How to Claim Tax Benefits on Personal Loans?

Type of Deduction Income Tax Section Maximum deductible Conditions for Claiming Deduction
Income Tax Deduction Section 80C Rs.1,50,000 Possession of house property should be retained for at least 5 years.
Interest Section 24(b)
Section 80EE
Section 80EEA 		Rs.2,00,000
Rs.50,000
Rs.1,50,000 		Loans for the purchase/construction of
A loan should be above 3,00,000, and the property value less than Rs.50,00,000
The stamp duty value of the property should be less than Rs.45,00,000
Stamp Duty Section 80C Rs.1,50,000 Claims can be made only in the same year as expense.

Now that you are aware of the tax benefits on personal loans, it is important that you don’t miss out on getting the same. Understanding that these provisions can be complex for someone who is not from a tax background. However, getting help from tax experts can help you make the most of deductions for personal loans.

Get expert advice now!

Frequently Asked Questions

Q- Is a personal loan covered under section 80C?

Personal loans availed for the purpose of purchasing or constructing a house property are covered under section 80C. Interest paid can be claimed as a deduction under section 24. However, loan repayment is covered under section 80C.

Q- Can I get a personal loan using ITR as proof of income?

The documents required for loan approval might vary from lender to lender. While you can get a personal loan using an ITR as proof of income, some people may also provide a personal loan without requiring you to submit an ITR.

Q- What types of loans are exempted from tax?

Loans like home loans, education loans, and loans on electric vehicles are some types of loans that are exempt from tax.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.