Personal loan has become one of the popular loans these days that help individuals meet their current financial needs such as the marriage of their son/daughter, construction or renovation of their home or any other. A personal loan is an unsecured loan that people often apply for as there is no security required for it and the processing time is short. It is usually taken by those who necessitate quick and easy loans with low-interest rate and minimum documentation.
Typically, a personal loan is not considered as part of your income, so this loan will not be considered as a taxable fund when you are filing income tax returns. But you need to make sure that the loan should be taken from an authorized bank or any other financial body as loans from unidentified sources are considered as part of your income while calculating your taxes.
Exception to the Rule
If you can prove that you have used the loan amount for a few valid expenses, you can actually use your personal loan for tax savings and can claim tax relief on the same. A few examples where you can claim tax benefits on personal loan include cases such as if you use the loan amount to finance your business expense or if you have taken a personal loan for your house such as performing renovations.
Personal loan to buy a residential property
Section 24 (b) of the income tax act provides relief to the home buyers by giving them the privilege of tax deduction on personal loan if it is taken to buy a residential property or to renovate it. If you use a personal loan for the down payment of a property, you can claim tax exemption. This clause is also valid if you use the loan amount to pay for home repairs, renovation, or for reconstruction, all these are considered valid expenses for the tax deduction.
Note that you can only claim the tax deduction on the interest amount, not on the principal amount of the loan. In case you are currently living in a house on which you have spent your personal loan amount, then you are eligible to claim tax reduction for interest amount of around Rs. 1,50,000. But if you are living in a rented house, then there is no limit on the interest amount that can be claimed.
Also if you have invested in a house that is under construction, you cannot claim the tax deduction until the property is completely constructed. Also, you need to assure that the property will be ready to acquire within three years if taking the loan. Preserve all the documents needed to provide proof that you have spent the loan amount in construction or renovation of your house. If you have used the amount to carry out the repairs or renovations, preserve the bills for materials and labor. These are needed to claim your tax deductions.
Personal Loan for Financial Business Expenses
The exception to the rule also applies for the financial business expense. You must be personally liable for the loan and should be able to enumerate what portion of the interest paid is attributed to legal business expenses. Similarly, if you use a personal loan to buy a motor vehicle that you use solely for business i.e. commercial purposes, then all of the interest on the loan is tax deductible.
Conclusion
A personal loan is considered as an ultimate option to meet immediate financial needs. They can also be used as tax saving tool if used properly. So you need to understand how you can get a personal loan for your assistance while claiming tax benefit from it too.
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