A personal loan helps you get through financial emergencies. They are easy to avail and often have lower rates of interest. So, whether it is to fund your higher education or your dreamy wedding, or a medical emergency, a personal loan helps you tackle it all and in the comfort of your home too! And you will be glad to know that you can claim personal loan interest as a deduction depending on the purpose of the loan.
So, the question “Is personal loan taxable” must be running in your head. The answer is no. If you take a personal loan from a recognised bank or NBFC, it is not part of your income, and hence it is not charged to tax. However, if you take a personal loan from a third person like a friend or a family member, it might be taxable as it could be treated as part of your income.
How to Avail Tax Benefits on Personal Loan?
And if you are now wondering if there are any tax benefits on personal loans, the answer is no. This is because personal loans are mainly unsecured loans which mean they are not secured against any assets. However, the Income Tax Act, 1961 offers few tax benefits for personal loans taken for a specific purpose. Some of the examples are:
- Home loans: Loans taken to purchase a house property or renovate your house have few tax benefits. If it is a self-occupied property or rented out to a third person, you can claim an interest deduction of up to Rs 2 lakh under section 24 of the Income Tax Act. You can further claim benefits of up to Rs 1.5 lakh under section 80C (including other eligible deductions) on the principal amount. Suppose you are a joint borrower and a joint house property owner. In that case, each person can claim the interest benefit of Rs 2 lakh and the principal repayment benefit of Rs 1.5 lakh (including other eligible deductions).
- Business Loans: Term loans secured against assets such as stock, land, or property have some tax exemptions. So, if you have taken a loan for any business expansion purpose or even to start a business, then you could claim interest paid on such loans as a business expense. However, if you take a personal loan for business or even unsecured business loans, you need to be aware that there are no tax benefits.
- Personal loan for the purchase of any asset: Besides a house property, numerous assets produce income such as shares, gold, or commercial property, and if you need funds to purchase any of the above assets, you could apply for the appropriate product and avail tax benefits against the same. However, it would be best to keep in mind that personal loans taken even for the above purposes are not eligible for any tax benefits. Though, recently, the Government has come up with tax benefits for the same in a bid to encourage residents to purchase more electric vehicles. So, if you have availed of any loan to buy an electric vehicle, you can claim an interest deduction of up to Rs 1.5 lakh.
So, now that you know the various tax benefits available, you must be wondering how to calculate your loan eligibility. Well, here’s how:
The loan amount you can avail of depends on your income level, credit history, employment history, and repayment capacity. In addition, you must be at least 21 years of age at the time of making a personal loan application and less than 65 years of age.
It would be best to remember that your net income, which is the income after tax has been deducted, will be considered for calculating your loan eligibility. If you are not a salaried employee but a self-employed person, your profit after tax will be considered. You must also consider any other EMI that you are currently paying.
Head on to the Kotak Mahindra Bank website. You will be able to roughly calculate an estimate of your loan eligibility by using the personal loan EMI calculator, which will help you plan and manage your finances.
So, if you are holding back on purchasing any asset or investing in a house property due to lack of funds, you should avail of a personal loan and claim tax benefits wherever applicable.
