Tax Benefits of Personal Loan allowed in 3 Cases

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Personal Loan is one of the easiest loan to avail and can be used for any purpose. For availing a personal loan, banks ask only for very few limited details and very easily give this type of loan.

Although this loan is a bit expensive as compared to other types of loans, but is the easiest to avail as well and comes with lesser restrictions.

The Indian Tax Laws also allow certain tax benefits for repayment of loans. We have previously written about Tax benefits of Home Loan, Tax Benefits of Education Loan etc and in this article we would be focussing on the Tax benefits of a Personal Loan.

Tax Deduction for Personal Loans in India

In the Indian Income Tax Act, there is no specific deduction allowed for a Personal Loan. However, there are deductions allowed for other loans which are used for a specific purpose like Education Loan, Home Loan, and Business Loan etc.

So to avail a deduction for Personal Loan, the purpose for which the personal loan has been availed would be taken into consideration. If the personal loan has been taken for a purpose for which income tax deduction is allowed, then the deduction for personal loan would be allowed, else it would not be allowed.

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Deduction for personal loan would be allowed only in case this loan has been taken and the amount used for the below mentioned purposes.

  1. Amount invested for Business Purpose

If the amount raised through a Personal Loan has been invested in the business, then the interest paid would be allowed to be claimed as an expense. This will in-turn reduce the net taxable profits of the business thereby reducing the tax liability. There is no maximum limit for the amount which can be claimed as an expense in such a case.

  1. Amount invested for purchase/construction of a Residential House

If you taken a personal loan and the amount have been invested for purchase/construction of house, a deduction for the same would be allowed under Section 24.

Several CA’s are of different opinions on whether the deduction would be allowed or not if the amount raised from a personal loan has been invested in purchase/ construction of a Residential House. However, a majority of the CA’s believe that Deduction under Section 24 for repayment of such interest if the amount has been invested in purchase of a Home.

The maximum amount of deduction allowed in this case is Rs. 2,00,000 for Self-occupied house. However, there is no maximum limit if the amount has been invested in a house which has been given on Rent or has been deemed as let-out.

  1. Amount invested for the purchase of any other Asset

If the personal loan has been taken for the purchase of any asset like Shares, Jewellery, Non-Residential House etc, the amount of interest paid on such loan would be added to the cost of acquisition of the asset.

Deduction for this won’t be allowed immediately in the year in which the interest has been paid but would be added to the Cost of Acquisition and Tax Benefit would be allowed in the year in which such an asset has been sold. This will increase the Cost of Acquisition and in-turn reduces the Capital Gains which would arise on the sale of such an Asset.

In all the above mentioned cases, Deduction would be allowed for the Interest component of Personal Loan. The deduction would not be allowed for the repayment of the principal component but would only be allowed for the repayment of the interest component.

If the amount raised through a personal loan has been used for any other purpose, then no income tax benefit would be allowed for the same.

Other Relevant Points regarding Tax Benefit of Personal Loan

  1. When the amount raised through a Personal Loan is received, no tax would be levied in the hands of the recipient as the amount received is not an income but a loan.
  2. There should be proper evidence that the amount raised through a Personal Loan has been used for the specified purpose as mentioned above to be eligible to claim deduction.
  3. To claim Income Tax Benefits for a Personal Loan, you should keep a copy of all important documents like the amount of loan taken, amount and interest to be repaid and all other relevant documents.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.