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How to Get the Maximum Tax Benefit on Personal Loans

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How to Get the Maximum Tax Benefit on Personal Loans

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Understanding a personal loan

A personal loan helps you out of financially tight spots such as a medical emergency. It is also used to pay for products and services, fund your education, or sponsor your holiday. A personal loan is easy to apply for and quickly disbursed. It is an unsecured loan, which means that the bank or the NBFC is lending you the money without asking for any security in return. 

This can be a risky proposition for the lender with the element of not getting the money back. To counter this risk, lenders lend at a higher interest rate but also provide enough time to repay the loan. Together, the interest and original sum borrowed, along with the tenor chosen, directly determine your EMI amount. While there is no tax benefit on the principal borrowed, the interest paid over it can help you save on taxes. 

Let us understand how.

Tax benefits on a personal loan

Since a loan is not a part of your income from direct or other sources, there is no tax liability over it. However, when it comes to the interest paid on the loan, there are ways in which you can get tax rebates on a personal loan. Here are a few such scenarios.

Loans for home repair or renovation

One of the many ways personal loans can be used includes repairing or modernising your home. In such a situation, Section 24 income tax benefit on interest on a personal loan becomes applicable. This section of the Income Tax Act, specifically, pertains to loans used to purchase, renovate, or construct a residential property.

Subsequently, if you choose to put the property on rent, then there is no upper limit to the rebate amount that you can claim. However, if you live in the same property, then you can get a tax benefit (on the interest paid only) of up to ₹2L per annum. This amount automatically gets deducted from your annual taxable income.

It is worth noting here that the property and the personal loan must be in your name to avail of the tax benefit. For this, you need to retain all original documents, as they may be required by the lender’s team for verification purposes.

Loans taken for tax-saving investments

Some people borrow money to invest in financial instruments to help save tax. This is especially more effective when there is an increase in tax-saving FD interest rates.

So, how it works is like this. You borrow, say ₹5L in the form of a personal loan and invest in a tax-saving fixed deposit with an interest rate of 8-9% per annum. Senior citizens may even get up to a 10% interest rate. On the other side, you choose a 5-year repayment tenor and keep paying back the monthly EMIs to the lender. Before choosing to do this, you need to calculate the pros and cons thoroughly. 

One big advantage of doing this is registering yourself for a credit product. This is particularly beneficial for people who are new to credit and need a credit history. By paying your EMIs on time, you can develop a good credit score that will help you get better terms and rates the next time you borrow, like when you go for a home loan.

While you can get a higher interest rate and also save on annual taxes (up to ₹ 1.5L) under Section 80C of the Income Tax Act, a personal loan comes with a higher-than-usual interest rate. Unlike the previous example (home renovation), this interest cannot be used to save tax. Moreover, a tax-saving fixed deposit typically comes with a lock-in of five years, and you cannot withdraw your money in the meantime. 

So, unless you get a personal loan at a very competitive or discounted interest rate, this may not be greatly financially beneficial for you. 

To conclude

Although a personal loan does not attract any tax on it, it does not offer any tax benefits either, unlike secured loans such as a home loan or a business loan. But, a personal loan is easier to obtain, and convenient to repay, and you can use it for various expenses. Ensure you take a personal loan from a credible and authorised lender, or else the government might consider the loan as income from another source, in which case the amount borrowed will become taxable.

On Fi Money, personal loans are instant and paperless. In most cases, you may also be pre-approved for an amount that will be disbursed to you in minutes.


Can I claim tax benefits on a personal loan?

Simply put, a personal loan neither has a tax implication nor offers a tax benefit. The exception to the rule is a loan taken for home repair and renovation. In such a case, under Section (b) of the Income Tax Act of India, you can claim deductions of up to ₹2L on the interest paid by you for the year. This is valid if you’re residing on the same property. If you have given it up for rent, then there is no cap on the maximum deduction that you can make for tax-saving purposes.

Is there any tax benefit on a personal loan?

A personal loan is an unsecured loan and as such comes with no tax benefits, barring the loan taken to buy, construct, or repair residential property. In such a scenario, and if you live on the same premises, you are allowed to deduct a maximum of ₹2L as tax benefit on the interest paid on the loan year for the financial year. If your property has been rented out post the completion of repairs, then there is no upper limit on the amount that you can claim under Section 24 (b) of the IT Act. 

How do I claim tax benefits on a personal loan?

Here are a few tips regarding claiming tax benefits on a personal loan. 

  1. The principal borrowed as a personal loan does not attract any tax over it. Always borrow from authorised lenders after checking their credentials. This is to eliminate the risk of the income tax department considering your loan as a form of income and making it taxable. 
  2. The only situation in which a personal loan offers direct tax savings is when it is used for the construction or repair of a house (or another form of residential property). In such a case, Section 24 income tax benefit on interest on a personal loan allows you to deduct a maximum of ₹2L per year in the form of interest paid on loan. If you have rented out the property, then there is no ceiling to the deductible amount.
  3. The loan and the property must be in the same of the same person to avail of the tax benefit.
  4. The total interest paid (as per the guidelines laid out in point 2) can then be deducted from your annual taxable income while filing your income tax return of the year. 
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