InvestorQ : I recently heard that one can claim tax exemptions on a personal loan. Is it true? If so, how?
tanvi Patel made post

I recently heard that one can claim tax exemptions on a personal loan. Is it true? If so, how?

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priya Shah answered.
3 years ago
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Yes, it is true that you can claim tax on your personal loan. However, it is not something most people know of. So, let's understand the concept a bit better.

Take the case of Rahul, a 34-year-old software engineer from Pune who had taken a personal loan from a private bank for home renovation and repairs. While he was happy that the personal loan came handy when he needed it, the tax exemption was the icing on the cake for him. He was able to claim tax exemption on his personal loan while filing his tax returns in that year.

When the time to file his tax returns arrived, he claimed exemption for his personal loan. Do note, however, that claiming exemption for personal loans comes with certain conditions. Tax exemption is allowed only if the loan is used for specific types of expenses. In Rahul's case the tax benefit was applicable since he used the loan to buy or renovate home.

One can also get a tax exemption in order to meet business-related expenses or buying assets. Additionally, you can also claim tax exemption on the interest paid while repaying the loan. Remember, the funds received by Rahul from the bank is not taxable for him since it is not considered to be his income.

Following are the various scenarios in which one can consider a personal loan and save tax on the same.

Buying a house

You can use the personal loan amount to buy your dream home for residential purposes. The interest paid on such a loan can be claimed for tax exemption under Section 24(b) of the Income Tax Act. One can avail tax exemption of up to Rs 2 lakh every year until the loan is repaid.

You can also use the loan to buy a home and then give it on rent. In this scenario, the interest paid on personal loan would also be tax-free. However, one should keep in mind the rent received will be added to your taxable income. Personal loan can also be used for construction of your home and the loan interest will be eligible for tax exemptions.

Renovating your house

As explained in the above example, you can use personal loan to renovate your house and claim tax exemption of up to Rs 2 lakh on interest paid and Rs 1.5 lakh on principal amount paid to the lender.

Loan for education

Personal loan used for education too can be put to great use while calculating your income tax. Similar to house renovation loan, you can avail a tax deduction on all the interest paid on education loan. However, there is no limit on the interest amount you can claim from your taxable income. Also you can avail education loan for your spouse and children as well. Remember, tax deduction will not be availed if your partner or child already have an existing education loan.

Loan for business

Personal loans comes handy in order to meet business expenses as they are easy to avail it along with quick disbursement. In this scenario, the interest payable towards personal loan is considered as business expense which can effectively reduce your business net profit thereby resulting in a lower taxable income.

Buying other assets

Personal loan can also be used to buy other assets. It may include shares, jewellery, or a property for non-residential purposes. The interest paid on the loan for acquiring such assets would be added to the cost of asset acquisition. Few years later, you may even sell the acquired asset. A capital gain or capital loss is calculated by taking the difference between the selling price and the cost of asset acquisition. The interest component of the loan will increase your cost of acquisition thereby reducing the capital gain. One should take a note that capital gains made from the asset are taxable and will be added to your taxable income.

A personal loan availed for requirements other than mentioned above will not be eligible for tax exemption. Few examples such as loan availed to meet medical expenses, finance a wedding, or pay for a holiday trip will not be eligible for tax exemption.

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