Personal loans and tax benefits: How to maximize your savings

Personal loans are one of the most commonly used financial tools to address the need for emergency funds, as they can be used for multiple purposes. These are unsecured loans, meaning they do not require any collateral as a guarantee. Compared to other loans, eligibility for a personal loan is less strict, and therefore, it is accessible to many.

Due to its wide usage, many borrowers often have questions about possible tax benefits on personal loans. However, it must be noted that personal loans do not qualify for direct tax benefits.

“Personal loans are generally not linked to investments or income generation and, therefore, do not provide direct tax benefits. However, in certain cases, you can claim tax deductions on the amount used for specific purposes under the Income Tax Act of India,” according to Rohan Bhargava, Co-founder of CashKaro and EarnKaro.

Tax benefits can be availed of personal loans utilised for certain purposes

Personal loan for buying a house or home renovation: According to Saif Ahmad Khan, Founder, LEDSAK.AI, “If a personal loan is taken for the purpose of buying, constructing or improving a self residential house, then such amount spent on interest may be eligible for a deduction under section 24(b) of Income Tax Act 1961. For a self occupied house, the maximum amount of deduction allowed is ₹2 Lakhs per annum.”

A taxpayer can claim a deduction under section 24(b) on account of a loan taken for the purchase, construction, repair, reconstruction or renewal of property, as per the Income Tax Act, 1961.

Personal loan for education: According to Bhargava, “if you take a personal loan to fund the education of yourself, your spouse, or your children, you can claim tax deductions on the interest component under Section 80E. This deduction is available for a maximum of eight years or until the loan is fully repaid, whichever is earlier.”

Section 80E of the IT Act relates to the deduction in interest paid on education loans. It aims to provide relief to taxpayers who have taken loans for higher education.

Personal loan for businesses: If you plan to get a personal loan for business purposes, you can get tax benefits. “If the loan is advanced for the purpose of investing or incurring business expenses then such interest paid can be claimed as a business cost and as such reduce taxable income,” Khan said.

However, certain points must be considered before getting a personal loan to qualify for maximum tax benefits.

It is suggested that the purpose of getting a personal loan must be according to its use.

“It is also important to ensure that the loan's purpose aligns with its intended use. For instance, if you are borrowing for building or purchasing a house, opting for a home loan may be more beneficial, as it is easier to prove the loan's purpose and may offer better terms and benefits,” Bhargava said.

You must also be required to provide the necessary documents according to the intended use of the loan.

“In order to enjoy the tax benefits cited above, one will be required to provide related documentary evidence consistent with the end-use of the loan,” Khan said.

In case of further clarification, do not hesitate to contact a tax expert to know more about tax benefits according to the purpose for which the personal loan has been availed.