Personal loans offer individuals the flexibility to meet any financial emergency, like home renovations, buying a gadget, or any medical expense. These loans are easily accessible to borrowers with convenient eligibility criteria and repayment terms.
To top it all, personal loans are unsecured types of loans that typically do not need any collateral, like your property or a car. This is beneficial when compared with other options like education loans or home loans.
As far as personal loan tax benefits are concerned, these types of unsecured loans might not offer the same benefit quotient as that of a home loan or an education loan. While you can use the funds out of a personal loan for various applications, tax benefits on personal loans tend to be limited to specific cases only.
Can We Deduct Personal Loan Interest in Income Tax?
While there are no specific tax benefits on a personal loan, you can still avail some personal loan tax benefits in unique cases. To understand whether or not you can deduct interest rate in income tax, here are some points to consider:
1. Home Construction or Purchase: When you take a personal loan for some construction work or for buying a house, you can claim a deduction of the interest rate paid on such loans. For instance, if you aim to use the house for your self-occupation, you can claim an interest deduction of up to INR 2 Lakhs. However, the limit is reduced to INR 30,000 in case the construction or purchase process is not completed within 5 years from the end of the capital year during when the amount was borrowed.
If you aim to let out the space on rent, then the entire interest rate will qualify for an income tax deduction.
2. Home Renovations: If you wish to take a personal loan for repairing or renovating your home, you will be eligible for a tax deduction under Section 24(b) of the Income Tax Act. Under this act, you will be able to claim a deduction of INR 30k per year on the interest rate paid on the personal loan.
3. Education-related Expenses: Are you taking a personal loan to fund any education-related expenses? In this case, you can claim the tax deduction on the interest rate under the provisions of Section 80E. You can claim this deduction for a maximum of 8 years or until the loan amount is repaid, whichever might be earlier.
4. Launching a Business: Are you planning to start a business or invest in any business venture? You can claim the interest paid in the form of business expenses under the provisions of Section 37 of the Income Tax Act.
What to Know Before Reporting a Personal Loan in Your Income Tax Filing?
As you plan to report your personal loan on the income tax filing, you should understand that personal loans are not regarded as taxable income. This is because they represent borrowed funds that you should repay within the stipulated loan tenure.
However, if a portion of the loan is forgiven due to any reason, this amount is considered taxable. Moreover, the interest rate on these loans is also taxable under specific conditions, like education-related costs or business investments.
Can Personal Loans Be Used for Tax Savings?
In most cases, personal loans cannot be used for tax savings. There is no tax rebate on personal loans. Usually, tax rebates are associated with specific loans like education or home loans which are subject to specific tax laws.
How a Personal Loan Can Influence Your Taxable Income?
Typically, a personal loan does not impact your taxable income. This is because it is not regarded as a source of income but a borrowed sum of money that is expected to be repaid within a given tenure.
Avoid Mistakes in Reporting for Personal Loans in Income tax Returns
You should aim to avoid some mistakes while reporting for personal loans in your income tax returns. Some to consider are:
1. You should know that personal loans are not regarded as taxable income sources. Therefore, you should aim to repay the loan amount within the tenure.
2. The interest rate of the personal loan is not deductible unless you use the funds for specific purposes, like education-related.
3. Always be attentive to your documentation on how you use the loan amount. Inaccurate information in your tax filing can lead to penalties.
Better Loan Options for Maximum Savings
You are expected to choose the right loan option to minimize interest rates and maximize your savings. In addition to personal loans, you can also consider unsecured options like a home loan or an education loan. Leading lenders like Stashfin offer competitive rates on personal loans to maximize your savings.
Conclusion
Personal loans do not typically offer any tax benefit. However, if you use the loan amount for specific purposes, like buying a house or funding your education, your case can be eligible for tax deductions under specific tax laws.
Frequently Asked Question
Can I Claim Deductions on Personal Loan Interest for Tax Purposes?
Yes. There are some cases in which you claim tax deductions on the interest rate of personal loans. Some instances include a home renovation project, buying a house, or funding education.
How Does a Personal Loan Affect My Tax Filing?
Typically, a personal loan application will not affect your tax filing. This is because it is not considered taxable income. You should maintain proper records to help with proper tax reporting.
Can I Include My Personal Loan in Income Tax Returns?
No. You can exclude your personal loan information while filing income tax returns. This is not any source of income. It is a borrowed sum of money that you need to repay in some time.
What Tax Benefits Can I Get from a Personal Loan?
The overall tax benefits you get from a personal loan will depend on the ultimate use of the available funds. You should maintain proper documentation to claim tax deductions, if applicable.