Thursday, February 8, 2018

All You Ever Wanted to Know About Tax Benefits On Personal Loans

Personal Loans are becoming convenient means of getting emergency funds for various purposes. They are easy to get, and you don't have to declare the purpose for which you are using the loan. Did you know that Personal Loans can also in certain situations, provide you Tax Benefits?

Personal Loans

Personal loans are unsecured loans. You don't have to provide a collateral for getting the funds. As they are unsecured, they come at high interest rates. However, because they do not require any security, there are fewer documents to verify, so these loans are processed quickly.

While you can get personal loans even with a low credit rating, the interest charged can be very high. If your credit score is good, you have a better chance of getting the loan quickly and at lower interest rates. 

With Personal Loans, you don’t need to declare the end use and show proofs as you have to do with a Home Loan or Car Loan. You can use the funds raised for any purpose. You can use it for an emergency expense, for medical or hospital bills, for educational funds, for buying new furniture, to buy home appliances, to raise quick funds for your business and so on.

As long as you stick to the repayment schedule, and don't get too many personal loans at once, you can probably repay the loan on time and be relieved of an expensive debt. However, unlike a Home Loan, you don't normally get tax benefits on a personal loan.

Or do you?

Tax Benefits on Personal Loans?

With a Home Loan, you get tax deductions on the principal repayment and on the interest paid on the loan. So, you generally get a Home Loan to buy a house or to carry out repairs and renovations. As they are secured loans (the property you buy is the collateral), the interest charges are much less compared to Personal Loans.

So, why would you get a Personal Loan to buy a house? Normally you wouldn't. But there might be exceptions. For instance, you generally get only around 80% of the total cost of the house as a Home Loan. You would have to pay the rest yourself as down payment.

You may not have access to enough funds for this down payment. But you need to make the payment quickly to get your Home Loan processed and to buy the property. You may be thinking of renovating or redecorating your house. A good option might be a Top-up loan on your Home Loan, but you currently may not have made enough repayments to have the necessary equity on your home for a top-up loan.

In these and other cases, you may resort to a personal loan if you are confident of keeping up with the repayments on your Home Loan and Personal Loan.

Tax Benefits on Personal Loan Used for Residential Property

If you use your personal loan funds towards acquisition of a house or to renew or remodel it, you can show proofs of the expenses to avail tax exemption on the interest paid on the loan. According to Section 24(b) of the Income Tax Act, use of borrowed capital towards purchase, renovation or repairs on your residential property entitles you to tax deductions on the interest of the repayment.

Section 24(b) does not specifically mention the type of loan. So, even if you take a Personal Loan to bridge the gap between the Home Loan and the actual cost of the house, or to repair the house, you can claim a tax exemption on the interest amount paid. Note that you cannot claim deductions on the principal, only the interest component.

If the loan has been taken for a house that you live in, you can claim a deduction of up to Rs. 1.5 Lakhs on the interest amount paid in that year. If the house is still under construction, then you will have to wait until the construction is completed. If you have let the house you borrowed the amount for on rent, there is no cap on the interest amount you can claim deduction on.

Remember, if you are carrying out repairs or renovations, save all the bills for materials and labor. You need to show these as proofs to get the tax benefits on personal loan.

Tax Benefits on Personal Loan Used for Your Business

Funds you use for business purposes can be deducted from your net profit as expenditure. So, any funds raised through a Personal Loan that you have used as business expense can also help you save on taxes. The expenditure brings down the taxable profit, so your tax liability becomes less.

While you don't generally associate Personal Loans with Tax Benefits, depending on how you have used the funds, you can claim deductions and save on taxes.

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