How to get tax benefits on personal loans in 2020?
You may take on a personal loan to meet immediate needs or planned expenses. Whatever the use of the funds from a loan may be, you will be required to pay interest on the principal amount. The amount you pay every month to repay the loan is referred to as an EMI. While taking a loan may be necessary, the Income Tax department does offer some relief to the borrowers.
However, the Income Tax Act, 1961, does not directly mention any particular tax deduction on personal loans. As a result, the tax benefits on such loans are linked to the end-use of the funds.
Is a personal loan taxable?
A personal loan does not fall into any category under the ITA’s source of income and hence, it is not taxable. However, as a taxpayer you are expected to provide proof that the money received and used is borrowed capital and not income earned.
Three ways to get tax benefits or enjoy tax savings on personal loans
Let us look at three different ways that allow you to avail tax benefits on your loan.
Personal loan for business investment
One of the significant benefits of taking a personal loan is that you can use it for your personal and business needs. When you use the personal loan amount for any business purpose, such as buying new assets or expanding your business operations, you can claim the interest paid on loan as a tax-deductible expense.
It would reduce the capital gains, and ultimately your net tax liability. There is no maximum deduction, as it depends on your interest payments for the financial year.
Personal loan for purchasing and constructing a residential property
The Income Tax Act’s Section 24, 1961, allows you to get tax deductions on the interest paid if a loan is used to buy or build a residential property. If the property is a self-occupied home, you can claim up to Rs. 2 lakhs. You will have to collect all the essential documents to prove the loan amount's final use to be eligible for tax deductions.
Personal loan for acquiring any other asset
Besides residential property, if you take a personal loan to invest in any other asset, such as shares, gold, jewelry, or non-residential property, you can claim tax deductions on the loan’s interest amount. However, you cannot claim these deductions in the same year. The interest amount is added to the asset’s cost of acquisition, and you can get the benefits only at the time of resale.
The listed uses are the ones in which you can get tax benefits on your personal loans. However, remember that the tax benefits can be claimed only on the interest amount and not the principal amount.
Ensure that you furnish all necessary documents as proof, this includes expense voucher, auditor’s report, sanction letter, etc. to be eligible for such deductions and savings.
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