A personal loan could be a suitable financial solution when you need quick access to funds. An instant personal loan can be used for several purposes like a medical emergency, big-ticket purchase, urgent home renovation and similar other expenses. With the emergence of quick loan apps and digital lending platforms availing a personal loan has become quite convenient.
However, one of the first questions that often arises when considering a personal loan is whether it comes with any tax implications and how it may affect your overall financial situation.
Let’s take a look at the details of interest rates, tax implications, and repayment terms for a personal loan.
What are personal loans?
Personal loans are used for personal expenses that can range from weddings and gadget purchases to children's education, unplanned vacations, and home renovations. Many borrowers are also seeking personal loans for debt consolidation.
Personal loans are basically unsecured loans, which means you need not offer any collateral or mortgage any asset to avail the loan. Due to the unsecured nature, personal loans come with comparatively higher interest rates compared to other secured borrowing options.
The banks and non-banking financial companies (NBFCs) offer the personal loans based on the borrower’s credit score and income level. The digital lending platforms have made it easier to avail personal loans with the flexibility to choose the amount and tenure as per your financial needs.
Moneycontrol has partnered with eight lenders to offer personal loans up to Rs 50 Lakhs. You can explore multiple loan offers through the Moneycontrol App and website. The interest rates start at as low as 10.5% per annum and it’s a completely paperless application process. You can get the loan in just three steps: enter your information, complete the KYC process, and set up an EMI payment.
Is there any tax on personal loans?
Personal loans are seen as a liability and not part of your income in a financial year. So, personal loans don’t attract tax as per the Income Tax Act, 1961.
The taxpayers can’t also claim tax deductions on the repayments for personal loans. However, if you take out a home loan to buy a property, the interest paid on that loan is eligible for tax deductions under Section 24(b) of the Income Tax Act. You can also claim deductions on the amount invested in a business if you incur losses. However, for these purposes, the taxpayer must clearly mention the exact amount from the personal loan invested in a business or used in the construction of a house. While filing the Income Tax Return (ITR), you may need to provide the relevant proofs to claim the deductions.
On the other hand, if the loan is used for personal expenses, such as travel or buying goods, no tax deductions will be allowed.
ALSO READ: How to Claim Tax Benefits on Personal Loans
Here are other key factors to keep in mind while availing a personal loan to reduce cost, though you are not paying any tax on the loan amount.
Key factors to check before finalising loan offer
- Check multiple offers: Explore multiple loan offers from banks and NBFCs to choose the most suitable personal loan as per your financial needs. The key is to select the lender that offers the most affordable loan as per your credit score and income level.
- Compare key components: Compare the loan amount, interest rates and repayment tenure to choose the best option as per your financial conditions.
- Look for lowest interest rate: Interest rate is the key component, which makes your borrowing costlier or cheaper. So, choose the loan that comes with the lowest interest rate. Generally, personal loan interest rates may vary between 10% and 36% per annum, depending on the lender.
- Choose EMIs carefully: Most lenders offer flexible loan tenures but choose the repayment schedule as per your financial conditions to avoid defaults in the future. However, a longer tenure may increase your total interest outflow while bringing down the Equated Monthly Instalments (EMIs) and vice versa.
- Don’t ignore hidden charges: Check the additional fees charged by the lender like the processing fee, documentation fee, or any other hidden charges.
Conclusion
Personal loans could be an ideal option to meet unexpected financial needs or some big-ticket spending. You also need not to worry about paying taxes on the amount you borrow. However, it’s important to follow financial discipline and use the borrowed money prudently. You can also claim deductions on personal loans if you use them for specific purposes. It is advisable to borrow money only when you are in dire need of funds to avoid a debt trap.Disclaimer
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