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Is Tax Benefit on Personal Loan Possible?

Is Tax Benefit on Personal Loan Possible

There are various tax deduction and benefits on education loan or home loan, however, there are hardly any tax deduction or exemption allowed on personal loans. Deduction on interest expense of personal loan are available in certain circumstances but they depend on the purpose for which the loan has been availed.

Ways to claim tax benefit on personal loans

Income tax deductions on interest paid on personal loans is allowed under certain circumstances mentioned below-

  • Personal loan for Business –

When the returns and income of personal loan are suggested to be invested in the business of the borrower, then the interest paid on the loan can be claimed as a tax deductible expense. Interest paid can then be subtracted from the profits before calculating the tax liability, this helps in reducing the net taxable profit of the business thereby decreasing the tax liability. There is no stipulated maximum limit for the interest amount which can be claimed as a tax deductible expense.

  • For purchase or construction of residential property –

Under Section 24, if the proceeds of a personal loans is utilised for constructing or purchasing a house then the borrower can avail tax deduction benefits.  So if you take a loan for purchase, construction, or renovation of your property, the interest gathered on the loan amount is allowed for a deduction from the Net Annual Value (Net Income) of the property. Under this section, the maximum amount of deduction allowed is Rs. 200,000 for either property out on rent, self-occupied property and deemed to be let out property. To claim this discount or deduction, you will have to submit a certificate issued by the borrower’s bank which will certify that the proceeds from the loan was utilized for purchase, construction, or renovation of the property.

  • Loan for purchase of any other asset

When the personal loan has been availed for purchasing assets like shares, stocks, jewellery or even for any non-residential house or property, the interest paid for the year on such loans are not permitted for tax exclusion. Nevertheless, the same gets added to the cost of acquisition of the asset, which in turn reduces its capital gains at the time of its sale, thereby reducing the capital gains tax liability on the sale transaction.

Things to remember while regarding tax benefit on personal loan

  1. The personal loan which you take is not taxable as the amount received on loan is not considered as a direct income.
  2. To be entitled for claiming tax deduction on the interest paid on your personal loan, you will have to submit sufficient proof to income tax department to support your claim, it can be either bank certificate or auditor’s certificate.

You should always keep a copy of all the important documents such as the sanction letter, expense vouchers, auditor’s report and bank certificate, to claim tax benefits on any personal loan you might have taken. These documents will have to be submitted to income tax department for assessment.


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