One of the simplest loans to get and use for any reason is a personal loan. Banks very readily approve personal loans by requesting only a small number of minimal facts.
Although this loan is more expensive than some other types of loans, it is also the one with the fewest requirements.
The Indian Tax Laws also permit some tax advantages for loan repayment. In a previous post, we discussed the tax advantages of home loans, student loans, and other types of loans, but in this one, we’ll concentrate on the tax advantages of personal loans.
In India, personal loans are tax deductible.
There is no particular deduction permitted for a personal loan in the Indian Income Tax Act. However, there are deductions available for other loans that are utilized for a particular purpose, such as business, home, and education loans.
So, in order to qualify for a personal loan deduction, the reason for the loan’s use must be taken into account. Personal loan deductions are only permitted if they are used for eligible expenses that can be deducted from income. Otherwise, they are not permitted.
A deduction for that loan is permitted only if a personal loan has been obtained and the funds have been used for the aforementioned purposes.
The investment amount is for business purposes
The interest paid may be deducted as an expense if the money generated through a personal loan was put toward expanding the company. As a result, the company’s net taxable earnings will decline, lowering the tax burden. The amount that can be deducted from income in this situation as an expense has no upper limit.
Amount spent on a real estate property’s purchase or development
If you took out a personal loan and used the money to invest in the purchase or building of a home, Section 24 would enable you to deduct that expense.
If the money collected through a personal loan has been invested in the acquisition or building of a Real Estate Property, various CAs have differing views on whether the deduction would be permitted or not. However, the majority of CAs think that if the money was invested in the acquisition of a home, Section 24 might be used as a deduction for the payback of such interest.
The most that may be deducted in this situation for a self-occupied home is Rs. 2,000,000. If the money was invested in a home that was rented out or was otherwise considered to be a rental, there is no upper limit.
The amount invested to buy any other asset
The amount of interest paid on a personal loan will be added to the cost of buying the item if it was taken to buy shares, jewelry, a non-residential house, or any other asset.
It won’t be possible to deduct this right away in the year that the interest is paid, but it will be added to the cost of acquisition, and a tax benefit will be available in the year that such an asset is sold. This will raise the cost of acquisition while lowering the capital gains that would result from selling the asset.
The interest component of a personal loan would be eligible for deduction in each of the aforementioned situations. Only the repayment of the interest component would be eligible for the deduction, not the repayment of the principal component.
No income tax advantage would be provided if the money generated through a personal loan had been utilized for any other purpose.
Additional Important Information Regarding Personal Loan Tax Benefit
No tax would be assessed on the beneficiary of the money collected through a personal loan because it is not considered income but rather a loan.
To be qualified for a deduction, there must be sufficient proof that the money acquired through a personal loan was utilized for the aforementioned purpose.
Keep a copy of all crucial documents, including the amount of the loan obtained, the amount and interest that must be returned, and any other pertinent paperwork, in order to claim income tax benefits for a personal loan.
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