Personal loans are a popular financial tool that can help individuals meet various needs, from consolidating debt to funding a major purchase or handling unexpected expenses. Unlike specific loans tied to assets like homes or cars, personal loans are unsecured, which means they don’t require collateral.
This makes them accessible to a wide range of borrowers, though interest rates can vary depending on the lender’s credit policy and other factors. Personal loans offer flexibility, with fixed repayment terms and monthly instalments making it convenient to clear the debt over a predefined period.
It’s a common notion that tax benefits can’t be claimed on personal loans, unlike home loans or business loans. However, borrowers can claim income tax benefits on personal loans availed for specific purposes. To claim deductions on personal loans, you need to plan it well and provide all documents to support your claim.
Let’s take a look at how to claim tax benefits on personal loans and why documentation for this purpose is crucial.
Personal loans can offer tax benefits, but these apply in specific cases. Here are a few scenarios where you can claim income tax deductions on personal loans:
Purchase or construction of Residential Property: Under Section 80C of the Income Tax Act, deduction from taxable income up to ₹1.5 lakhs in a financial year can be claimed on the principal repaid on a personal loan availed for the purchase or construction of a residential house. Under Section 24 of the Income Tax Act, you can claim up to ₹ 2 lakhs in tax deductions on the interest paid if the loan is used for purchase or construction of a house for self-occupation purposes. In case of a let-out property the entire interest amount can be claimed as deduction. The amount of deduction on interest will get limited to ₹ 30,000 the purchase or construction is not completed within 5 years from the end of the financial year in which the loan was taken.
Home renovation or repair: You can claim a tax deduction under Section 24 of the Income Tax Act up to Rs.30,000 per year on the interest paid on a personal loan for home renovation or repair. This is within the overall limit of ₹2 Lakh available on loan interest payment of self-occupied homes.
Business Investment: If you use a personal loan for business, you can claim a tax deduction on the interest paid under Section 37(1) of the Income Tax Act. This applies even if the loan is used for purchasing assets like vehicles for your business. The amount can be treated as business expenses.
Education Expenses: If you use a personal loan to finance your education or that of your spouse or children, tax deductions can be claimed on the interest paid under Section 80E of the I-T Act. This deduction is available for a maximum of eight years or until the loan is fully repaid, whichever happens earlier.
Personal loans taken for non-qualifying purposes, such as weddings or holidays, do not qualify for tax benefits.
You can explore multiple personal loan offers on the Moneycontrol app and website. The loans start at an interest rate as low as 12% per annum and you can borrow up to ₹50 Lakhs from eight lenders in a completely paperless process.
It’s crucial to produce documentary proof to avail tax benefits on personal loans used for these specified purposes. To claim tax benefits on personal loans, the taxpayers will be asked to submit valid documents supporting the claims during the filing of the Income Tax Return (ITR).
Here are the documents you need to keep handy for claiming tax benefits and a hassle-free ITR filing:
Documents For Residential Property Construction or Renovation:
Keep records of the loan disbursal and its specific use for construction or renovation.
Retain invoices, receipts and bills for all expenses related to construction or renovation work.
Maintain a copy of the completion or occupancy certificate for verification.
For Asset Acquisition
Retain loan agreements and documents related to the purchase of assets with personal loan funds.
Keep records of asset registration or ownership transfer.
Track any future transactions or disposals of the asset.For Business Purposes:
Use a separate account or ledger to track business expenses funded through the personal loan.
Keep invoices, purchase orders and receipts for all business-related transactions.
Ensure a clear separation between personal and business expenses to support your tax claims.
For Other Eligible Expenses:
Preserve documents showing the purpose of the personal loan, such as educational fee receipts or medical bills.
Maintain a detailed record of all expenses to ensure they meet the criteria for tax deductions.
Save bills and receipts: Keep all receipts and bills for loan-related expenses, whether for business, asset purchases, or property work. These will support your tax claims.
Record loan usage: Track each loan expense in a ledger or digitally. Include details like dates, amounts, and the purpose of each transaction for transparency.
Open a separate bank account: Use a dedicated bank account for loan transactions to easily track the funds and simplify record-keeping.
Loan agreement and bank statements: Keep the loan agreement and all relevant bank statements showing disbursements and expenses.
Audit reports for businesses: If the loan is used for business, get an audit report from a Chartered Accountant (CA). This helps identify any financial discrepancies and supports accurate tax filing.
If you are looking forward to borrowing money for the above-mentioned purposes to maximise tax benefits, you can do so through Moneycontrol app and website, which offers loans in partnership with eight lenders. The loans start at an interest rate of 12% per annum and you can borrow up to ₹50 Lakhs. The entire process is 100% digital and the amount can be credited to your account within minutes.
Did you know personal loans can offer tax benefits? If used for home construction, business, or education, you may be eligible for deductions—just ensure you have the right documentation.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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