Can you get tax exemptions on Personal Loans

February 24, 2020

Can you get tax exemptions on Personal Loans

While loans like Home Loans and Education Loans are very popular for their tax deductions and exemptions, are such benefits also available for Personal Loans?

With no limitations on the end-use, Personal Loans are a smart way to manage a range of significant expenses. You can take a Personal Loan to purchase the latest gadget, renovate your home, travel, or use it for a medical emergency or child’s education.  But while many different types of loans such as Home Loans and Education Loans come with tax benefits, are there tax exemptions available for Personal Loans too? Can Personal Loan save tax? Let us have a look:

Tax savings with a Personal Loan

Yes, there are tax deductions and exemptions available on Personal Loans too. But the tax benefits are only available in a few instances. The end use of the Personal Loan or how you use the loan money decides whether or not your Personal Loan is eligible for any tax deductions. Here are a few instances where you can claim tax benefits on a Personal Loan:

Home improvement

  • Under Section 80C of the Income Tax (IT) Act, a Personal Loan taken for home improvement is eligible for a tax deduction of up to Rs 1.5 lakh in a financial year. So, if you are taking the loan to renovate or improve your home, you can benefit from the tax saving on a Personal Loan. 

Purchase or construction of residential property

  • If you are taking a Personal Loan to purchase or renovate a residential property, you can claim tax deductions of up to Rs 2 lakh in a financial year under Section 24 of the IT Act. However, only the property owner is allowed to claim this benefit.

Business investment

  • If the proceeds from a Personal Loan are invested in business, the interest part of the loan can be treated as a business expense. This can help the business owner reduce his/her net taxable profits and thus reduce the income tax liability.

Asset purchase

  • A Personal Loan can be used for tax exemption if the loan money is used for purchasing assets such as non-residential property, jewellery, stocks, shares, etc. The interest component of the loan could be added to the cost of acquisition of the asset. This helps in reducing the capital gains of selling the asset.

Overview of tax benefits on Personal Loans

Here is a quick overview of all the different tax deductions and exemptions available on Personal Loans:

End-use of Personal Loan Borrower Implication Exemption/Deduction limit
Home Improvement Claimed as tax deduction under Section 80C Up to Rs 1.5 lakh
Purchase/Construction of Residential Property Claimed as tax deduction under Section 24 Up to Rs 2 lakh
Business Investment Reduces net taxable profits No limit
Asset Purchase Reduces capital gains on the sale of the asset No limit

Availing of tax benefits on Personal Loans

Personal Loan tax exemption is available but only in a few instances. You can consult your lender or a tax professional if the end-use of your Personal Loan is eligible for the tax benefits. 

Make sure that you have adequate proof to show how you have used the proceeds of your Personal Loan, so that you can take advantage of the available deductions and exemptions in a legal and easy manner. 

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