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Can You Get Tax Exemptions on Personal Loans?

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India is a tax haven by no means and in the financial year 2019 and 2020, the country had one of the highest income tax rates in the world. But like most other nations around the world, India too has several slabs for tax benefits, and if you know how to make use of them correctly, you can benefit significantly.

If you are planning on taking a personal loan and confused if it comes with tax benefits, then this article is for you. In today's article, we will discuss all the tax benefits that are present in India, the different income slabs they fall under, and if you have a personal loan, how you can claim a tax benefit on it. Let's get started.

What Is a Tax Benefit?

In simple words, a tax benefit can be explained as being a discount or savings on the total amount of tax you pay to the government every year. Essentially it is a financial instrument that has been designed to reduce the burden on the taxpayer by a significant amount so that they are encouraged to pay their taxes regularly and also save money and contribute to the country's development in the future.

In India, tax benefits are created by the Income Tax Authority and regularly updated to keep up with the changing times while simultaneously promoting responsible and disciplined behavior.

No matter, if you are a salaried employee or a self-employed professional, availing tax benefits in India can help you save a significant amount of money, and that's why it is important that you are well versed with it.

Tax Slabs & Benefits

Now that you know what tax benefits are, let us explore the tax slabs that are present in India, along with the benefits each of them come with.

 

In the financial year, 2019 to 2020 the following was the government proposed tax slab,

Annual Income

       Up to Rs. 2.5 lakhs No Tax

       Above Rs. 2.5 lakhs to Rs. 5 lakhs5% + 4% cess

       Above Rs. 5 lakhs to Rs. 10 lakhs20% + 4% ces

       Above Rs. 10 lakhs to Rs. 50 lakhs30% + 4% cess

       Above Rs. 50 lakhs to Rs. 1 crore30% + 10% surcharge + 4% cess

       Above Rs. 1 crore30% +15% surcharge + 4% cess

When you take a personal loan and pay back the EMI on the loan, you will be eligible for tax benefits. While there is no set forth mandate in the Indian Income Tax Act of 1961 for availing tax benefits on personal loans, the purpose for which you have taken the loan will be considered, and you will be eligible for a tax benefit.

Tax Benefits on Personal Loans

As per the Indian Income Tax Act of 1961, personal loans are categorized into four main categories, and each of them have their own tax benefits. Let us understand each of these better.

       Personal loan for improving your home

       Personal loan for purchasing or constructing a residential property

       Personal loan for investing in a business

       Personal loan for investing in other asset classes

 

If your personal loan application falls under any of these categories, then you will be eligible for a tax benefit.

Personal Loan for Improving Your Home

Section 80C of the Indian Income Tax Act specifies that if you take out a personal loan for improving your home, then you are eligible for a tax benefit. The mandate states that upon the total amount or principal amount of the loan, you can avail of a benefit of up to ₹150,000.

 

This means that when you are paying back your home loan, you will be eligible to claim tax deductions on your EMIs based on the mandate shared above.

Personal Loan for Constructing or Purchasing a Residential Property

If you have taken a personal loan for either constructing or purchasing a residential property, then the proceeds from the loan amount can be claimed as a tax benefit.

 

If you and your family are occupying the purchased or constructed property, then you can claim a deduction of a maximum ₹200,000.

 

On the other hand, if you have rented or leased out the property, then there is no upper cap on the amount you can claim a tax benefit.

The claim of tax benefits for this purpose falls under section 24 of the Indian income tax act.

Personal Loan for Investing in a Business

If you have taken out a personal loan, wherein you will use the amount as the investment in your business, then the interest you pay on the EMI of the loan is applicable for tax deductions.

One of the major benefits of this is the fact that it reduces the overall tax burden on the business and therefore allows for bigger profits and growth in the future.

Personal Loan for Investing in Other Asset Classes

If you take a personal loan to purchase an asset, for example, jewelry, shares, stocks, or non-residential property, then you can claim a tax benefit on the same.

The amount of EMI you are liable to pay along with the interest amount can be claimed as a tax benefit. The reason behind this being the government wants to encourage you to purchase more assets and thus gives regular discounts to attract you to the process.

Things to Keep in Mind

Now that you are well aware of the various tax benefits you can avail while taking a personal loan, mentioned below are some important pointers, you need to be aware of.

 The amount you receive in your bank account as a part of the personal loan availed by you is nontaxable since it is not part of your income. 

If you want to avail of the various tax benefits mentioned above while taking a personal loan, you need to make sure that you have adequate proof present so that your claim can be properly submitted, and you can take advantage of the benefit. 

Four main documents are required when you want to avail of a tax benefit on a personal loan, and they are as follows. 

1.      Sanction letter signed and sealed by the lender.

2.      Expense vouchers to display and justify where you have spent the borrowed amount and also to check if any of the spendings falls into the asset classes mentioned above.

3.      Auditors report

4.      Bank certificate 

All these documents need to be presented to the income tax authority when you are applying for a tax benefit on your personal loan. 

Conclusion

A personal loan comes with a host of different benefits, and it is one of the best solutions when you are in a cash crunch scenario. Along with this, when you take a personal loan and invest it wisely, you can claim tax benefits, and thus, it becomes a win-win situation. 

If you have been contemplating applying for a personal loan for some time now, go ahead and apply for one today. 

Author Bio: Surya Patra is a qualified webmaster by profession and Marathon Runner/Cyclist by passion with more than 6+ years of expertise in the financial domain. Surya is also an entrepreneur, enthusiastic in storytelling, content writing, and digital marketing professional.

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