It is mandatory for every earning individual to pay taxes. However, did you know that you can do tax exemption on a personal loan? Read on if you want to know how you can gain these benefits.
Every taxpayer has needed a personal loan at least once in their financial journey that has supported them during monetary emergencies. A personal loan is convenient for various purposes, such as funding a marriage, supporting medical expenses, renovating your house, financing your child’s education, or even paying back an existing loan. They are also highly beneficial since they are easily accessible and quick to get. Naturally, taxpayers would love to know how they can avail of tax exemption on personal loans. However, personal loans seldom provide tax benefits or deductions. But when an individual takes a loan for a particular purpose and uses it specifically to that end, then tax may be exempt to an extent.
Online aggregators for personal loans are steadily becoming very popular. Buddy loan is one such loan aggregator that has been supporting people with all their monetary needs. To know more about Buddy loans.
Personal Loan Benefits
Personal loans do provide tax benefits. Apart from this, they also have many other benefits, especially for those who need instant monetary help. A personal loan has many advantages, like quick approval, and it helps to build a credit score. It is also an unsecured loan. This means that it is easier to avail, although the interest rate might be slightly higher.
The interest rate of a loan is given by a bank or NBFC (Non-Banking Financial Corporation). It is one of the essential factors you must consider before getting a personal loan. When applying for a personal loan, research different banks and compare their interest rates before settling on any offer.
Personal loans are available for many purposes like purchasing a home, for renovation, business, or purchasing assets. Today, getting a loan from any bank or financial institution through online portals has become the norm. This has made personal loans easy to access. Many loan aggregators have also come up in recent times that meet the correct bill with the borrower’s profile and help ease the repayment process. They also require significantly less documentation as compared to banks and financial institutions.
The interest rate of personal loans will differ from one lender to another. It will also depend on the borrower’s preference whether they want a fixed or floating interest rate.
Personal Loans And Their Interest Rates
There are two different types of interest rates on personal loans. These include:
Fixed Interest Rate
When a person has taken a loan with a fixed interest rate, the interest rate will remain constant throughout the tenure of the loan. The monthly EMI would also be the same throughout the loan repayment. This interest rate helps to plan the monthly expenses in the long run.
Floating Interest Rate
Get a loan with floating interest rates. Interest rates will constantly keep changing depending on the current market conditions or the internal benchmark decided by the bank. As a result, the monthly EMI will also fluctuate and may increase or decrease each month.
The Interest Rate For Different Applicants on A Personal Loan
Most lenders consider different factors for deciding the interest rate for a particular application. Let us examine how the interest rate of a personal loan varies depending on the type of applicant.
Self-Employed & Salaried Professionals
The financial status of a borrower who is salaried or self-employed affects the interest rate significantly. Salaried employees with stable careers with reputed organisations usually get personal loans at a much lower interest rate than self-employed applicants. This is because the lenders believe that someone with a steady income and job security has a better ability to pay back the loan amount. However, self-employed professionals with good credit scores and healthy bank records can also obtain personal loans at competitive rates. The minimum salary to get a personal loan is INR 20,000 for most banks. Some private banks will give out instant personal loans to people with a minimum salary of INR 15,000. It should also be noted that there are no special personal loan tax exemptions for salaried employees.
Many banks tend to provide preferential interest rates to female applicants. This is to promote female salaried professionals and entrepreneurs who want to be financially independent and fulfill their dreams.
Pensioners also have particular personal loans meant specifically for their category. These loans are also usually provided at lower interest rates, especially from public sector banks. This is especially true in cases where the applicant’s pension account and the loan application is held with the same bank.
Eligibility Criteria For a Personal Loan
Personal loans provide emergency funds without the need for collateral. It is a type of loan that comes in handy in times of emergency as it is an unsecured loan. Which makes it easy and quick to get. To be eligible for an instant personal loan, an individual must be at least:
- 18-65 years of age
- have a credit score of 750 or above, and
- have an income of at least INR 15,000 or 20,000.
These eligibility criteria vary from one bank to another.
While the minimum salary to get a personal loan is 15,000 – 20,000, depending on the banks you choose. Many other factors contribute to whether an individual qualifies for a personal loan based on minimum income. These are:
the place of residence plays a crucial role in determining whether the minimum salary qualifies for a loan. The minimum salary requirement for individuals living in metropolitan areas like Mumbai, Delhi, or Chennai will be higher than that of individuals living in smaller towns. This is because the cost of living is higher in metropolitan areas.
The minimum salary requirement will also depend on whether the individual lives in a rented or owned house. This is because an individual residing in a rented apartment will have less disposable income than someone living in their home. This reduces the repayment capacity of the individual.
People with an excellent credit history will be able to get loans with a lower salary than those with a low credit history but a higher salary. This is because people with an excellent credit history have proven reliable and will take responsibility for their payments.
Personal loans and taxes
A personal loan is an unsecured loan that an individual receives from a financial institution or bank. It is not a part of the individual’s income which means it cannot be taxed. If the loan was taken from family members or friends, the amount might be liable for income tax as it may be considered part of their income. The ease of availability and purposefulness of personal loans has made many people take them up for various purposes like medical procedures, business, or home renovations. Therefore, many people would want to know if a personal loan has tax benefits as personal loans are utilised by almost everyone
Tax Rebate on Personal Loan
Tax exemptions or tax benefits on personal loans are available depending on the type of loan that has been availed. The IITA, or the Indian Income Tax Act 1961, allows an individual or an organisation for various tax exemptions and deductions on the principal repayment amount. Also, the tax deduction on the interest amount depends on how the funds are used.
Claiming Tax Benefits on Personal Loans
The IITA allows personal loan tax exemptions on the interest paid for the loans. A personal loan is availed for the following purposes:
- Business purposes
- The purchase or construction of a residential property
- Improvement of a residential property
- The purchase of any other asset
The interest paid or unpaid in the personal loan is a tax-deductible expense under section 37(1). The deducted amount is claimed when invested in the borrower’s business.
It is possible to deduct the interest paid from the profits before calculating the tax liability, reducing the business’s net taxable profit and thereby reducing the tax liability. Remember that there is no prescribed maximum limit for the interest amount that can be claimed as a tax-deductible expense.
The purchase or construction of a residential property
The loan amount used to purchase or construct a residential property can be claimed as a tax deduction under Section 24(b).
Suppose an individual takes a loan to construct or purchase a house under Section 24. In this scenario, the lender deducts the interest accrued on the loan amount from the Annual Net Income (Net Income) of the home or property. The deduction is limited to a maximum of INR 2,00,000 for properties that are let out, self-occupied, or deemed to be let out.
Under section 80 EE, a borrower can also claim deductions on the interest of up to INR 50,000 if they purchase their first home through a home loan. This deduction will be applicable if:
- The loan taken from a bank or banking institution,
- The stamp value of the house does not exceed fifty lakhs rupees,
- The loan sanctioned does not exceed thirty-five lakh rupees.
When the borrower does not own any other property besides the one, they are applying for.
Improvement of a residential property
Under Section 80 C, an individual can claim tax benefits on personal loan for a deduction of up to INR 1,50,000. A condition of the loan is that:
- The loan used for property renovation or improvement
- The property is not sold within five years of buying
- If the property was sold, then the claimed exemption must be repaid in the same year
Based on the credit history, there is a high probability of increasing tax benefits on personal loan. Do check with your tax filers.
The purchase of any other asset
Suppose an individual avail a personal loan for purchasing an asset such as jewelry, shares, non-residential property, vehicle, and more. In that case, the loan’s interest expenses can be the asset’s acquisition cost. This reduces the asset’s capital gains when sold, thus providing personal loan tax exemption on the sale transaction.
If a borrower has availed of an education loan, they can claim deductions under section 80 E on any amount paid as interest. However, there are two conditions under which one can avail of these benefits. These are:
- The loan availed under a taxpayer’s name is to fund their higher education or to fund the education of a relative.
- Taxpayers can claim the deduction for only eight years.
Can You Claim a Deduction of Prepayment Charges in India?
In India, taxpayers can claim a deduction for pre-payment charges that are incurred in connection with the acquisition of a taxable capital asset. Charges typically include stamp duty, registration fees, and other expenses incurred during the process of acquiring the asset.
To claim a deduction, taxpayers must demonstrate the charges incurred in the previous year in which the asset was acquired which are directly related to the acquisition of the asset. Furthermore, taxpayers must provide supporting documentation, such as receipts or invoices, to prove that they have actually paid the charges.
It is important to note that deductions for pre-payment charges are subject to certain limits and restrictions, and may not be available in all cases. If you have any questions about whether you are eligible to claim a deduction for pre-payment charges, you can consult with a tax professional or refer to the Income Tax Act of 1961.
If an applicant is eligible for an instant personal loan and is a taxpayer in India. They can find out how they can save money through the various tax rebates on personal loans. Many financial institutions and aggregators like Buddy Loan will give their customers the support that they need in their financial journey as long as the conditions are met.
Frequently Asked Questions
Q. Are personal loans tax deductible in India?
A. Generally, no. Personal loans are not tax deductible in India, which means that you cannot claim any deductions on your taxes for the interest you pay on a personal loan.
Q. Can I claim a tax deduction for the interest paid on a personal loan used for business purposes in India?
A. It is possible to claim tax benefits on personal loans for the interest used for business purposes in India. However, you will need to provide documentation to support your claim and to follow all relevant tax laws and regulations.
Q. Can I claim a tax deduction for home improvement loans in India?
A. It is possible to claim a tax deduction for the interest paid on a personal loan used for home improvements in India. However, the tax deduction is available if the home improvement is made to a self-occupied property. If the property is rented out, the tax deduction is not available.
Q. Can I claim a tax deduction for education loans in India?
A. If you take out a personal loan to pay for education expenses in India, you may be able to claim a tax deduction for the interest paid on the loan. The tax deduction available for education loans can be taken for higher education for both self and spouse.
Q. Can I claim a tax deduction for medical expenses in India?
A. If you take out a personal loan to pay for medical expenses in India, you may be able to claim a tax deduction for the interest paid on the loan. The tax deduction is available for medical expenses incurred for the treatment of certain specified diseases and is available for both self and dependents.
Q. Are there any other types of loans that offer tax benefits in India?
A. While personal loans do not offer any tax benefits in India, other types of loans such as mortgages, student loans, and business loans may offer tax deductions or credits. It’s always a good idea to consult with a tax professional or financial advisor to understand the potential tax implications of any loan you are considering.
Q. Do we get tax benefits on EMI?
A. It is possible to get a tax deduction of up to 1.5 lakhs per financial year on the principal repayment portion of the EMI according to section 80(c) of the Income Tax Act.