What Are The Tax Benefits On Personal Loans?
The benefit of a personal loan is that there is flexibility. It means you can determine the end-use of it. You can use a personal loan for any purpose. It can cover medical expenses, business, wedding, education costs or costs towards construction or repair of a house. It can be used to meet any such unprecedented financial emergency. Usually, in the case of such an urgency, a personal loan is considered hassle-free. You require minimal documentation to get an instant personal loan. Your bank may look at the following factors:
- Your Creditworthiness
- CIBIL score
- Monthly record of salary or copies of bank statements if you are self-employed
- Overall loan repayment record
Now you may wonder that since a personal loan is an unsecured type of loan, it does not come under the purview of your taxable income. It also does not form a part of your income during tax calculation, so how can you avail of the personal loan rebate? The answer to this simply lies in the end-use of the personal loan. For instance, if you use the money towards repairs or construction of a house, then you can claim a tax deduction or personal loan rebate under Section 24(b) on the interest paid on the personal loan. You need to prove that the money was used for repairs and renovation.
Here are some specified purposes under which you can receive a personal loan tax benefit:
Construction, renovation, reconstruction or repair of residential property:
You can claim a tax deduction if you have used the personal loan to construct, renovate, or repair residential property. That would be between the exempted limit of Rs. 30,000 to 2,00,000 as per Section 24 (b) of Income Tax Act. The deduction is for the interest payable on the loan.
A personal loan can also be used for funding or expanding your business. It can be used to generate revenue for your business, and the interest you pay on this loan can be considered as business expenses that can be deducted, thereby reducing your tax liability.
Therefore, you need to know the specified use of the personal loan you have availed and the benefit of exemptions you are entitled to as per the Income Tax Act provisions. Once you have ascertained its use, you can claim the tax benefit and reliefs on the personal loan.
You do not have to give a collateral for a personal loan. It is an unsecured type of loan. To avail the benefit of tax deductions on a personal loan, all you need to know is the specified end use of the loan and keep documentation ready. You may need that if there is a scrutiny of your returns in the future.
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