Personal loans are easy solutions to avail finance for purposes like tackling emergencies, funding higher education, vacations or weddings, or meeting other unexpected expenses. These are unsecured loans that do not require any collateral. 

While personal loan interest rates are often on the higher side, the Indian Income Tax Act allows no tax exemption on them. You can, however, avail deduction on expenses occurring from the payment of interest on such loans, depending on how you use the borrowed money.

You can claim a deduction in the following cases:

  1. Business

When you utilize the loan amount for investment purposes in your business, the interest you pay becomes tax-deductible. The interest paid on the personal loan, in this case, can be deducted from the profit amount of the business before your tax liability is calculated. Your net taxable profit is reduced, and this effectively reduces your tax liability. The maximum exemption limit for the sum of the tax-deductible interest is not defined.

  1. Construction or acquisition of housing property

When you use the money obtained through a personal loan for the purchase or construction of a house, then the interest accrued on loan is tax-deductible under Section 24(b). The interest on any loan availed for the renovation, construction, or purchase of a residential property can be deducted from the Annual Net Value of the property.

There is a prescribed limit under Section 24 on the maximum amount that can be deducted from the net income of the property owner. For example, it is Rs. 200,000 for a property that has been rented out or is deemed to be leased out or is self-occupied. For rented property, you can claim the entire interest on the loan for exemption.

You will need a certificate from the lender to claim the deduction. It should state that you employed the proceeds from the loan for renovation, construction, or purchase of housing property.

​3. Assets other than residential property

Exemption on the interest paid on credit is not permitted when it is used for acquiring assets like non-residential property, jewelry, or shares. Nevertheless, the interest is incorporated into the cost of the purchase of the asset. Thereby, the capital gains at the time of sale of the asset are lowered. This helps in reducing your tax liability on capital gains on the sale.

Some takeaways

  1. When you apply for personal loan, keep in mind that these are not taxable because the amount sanctioned is not regarded as an income.
  2. You must preserve all relevant documents such as sanction letter, bank certificate, auditor’s report, expense vouchers, etc. You may need to furnish these to the income tax authorities for appraisals.
  3. Personal loan eligibility depends on several factors, such as credit score, credit history, net income, and the like. You can determine it with the help of an online personal loan calculator.

If you are looking for funds to meet your expenses, check out Tata Capital personal loans. With no collateral, you can get a loan for up to Rs. 25,00,000.