Borrowers can claim tax deductions on personal loans if the funds available are used to meet specific requirements. Also, such provisions must fall under the specified category under the Income Tax Act to qualify for deductions.
If you are planning to apply for a personal loan for the first time, it would be best to determine when you can claim tax deductions on your borrowed sum. Take a quick look at the following sections to understand the topic better.
Tax Benefits For Borrowers On Personal Loans
Income Tax Act, 1961 allows tax deductions on personal loans to borrowers only if they use the sanctioned loan amount to meet specific purposes. Here are the cases that make loans eligible for tax deduction:
● Loan amount used for business requirements
The interest paid on funds raised as loans to meet business requirements can be claimed as expenses. This will lower the tax liability and overall cost of taking out a loan. Note that no such maximum amount can be claimed as an expense.
● Sanctioned amount used to construct or purchase real estate
A personal loan to purchase or construct a house would qualify for deduction under Section 24. The deduction is allowed on the loan's interest component, and the maximum amount is capped at Rs. 2,00,000 in case of a self-occupied property. However, there is no such limit if the amount taken out as a loan is invested in a property that is let out.
● Loan amount invested in high-end asset
Interest paid on a personal loan used to purchase assets such as jewellery, shares, and non-residential properties are added to the cost of asset acquisition. As a borrower, you should note that the deduction will not be allowed in the same year the interest has been paid.
The same will be added to the acquisition cost, and the resulting tax benefits will be considered in the year when the purchased asset will be sold. This way, the cost of acquisition will increase, reducing the capital gains through the sale of an asset.
From the above discussion, it is clear that the deduction is allowed on the interest component of a personal loan. Additionally, if a personal loan has been taken out for any other purpose, you would not be able to claim any tax benefits.
Things to Remember when Claiming Tax Benefits on Personal Loan
Keep these in mind when you claim income tax benefits on personal loan components:
● Ensure that you have proper evidence to prove that the loan amount is taken out to meet specific requirements.
● Keep a copy of crucial documents such as the amount of loan taken out, interest paid, and other necessary, relevant proof to claim tax benefits on a personal loan.
● Have proper evidence showing that you have paid personal loan interest and are qualified to claim a deduction.
Personal loan borrowers can avail of other means to lower their loan repayment burden. Take a look at the following tips to lower the loan burden and manage funds effectively.
Tips to Make Personal Loan Repayment Cost-effective
Keep these tips in mind while taking out a personal loan the make the repayment experience cost-effective and more manageable.
Tip 1: Compare interest rates
Before applying for a personal loan, compare the rates levied by different NBFCs to choose the most competitive one. However, do not forget to weigh in the features to make the most of it.
Tip 2: Find additional rates and charges
Most borrowers are concerned about personal interest rates and do not heed accompanying fees. However, having an idea about charges such as processing fee, penalty fee, foreclosure charge, prepayment charge will help determine the overall cost of borrowing.
Tip 3: Increase credit score
Applicants with high credit scores often avail of a personal loan at better terms, such as lower interest rates and flexible repayment options. Therefore, improve your existing CIBIL score before applying for a loan to avail funds at the best bargain.
Tip 4: Pick a shorter repayment tenure
A longer tenure might lower your EMI, resulting in a higher loan burden. On the other hand, by picking a shorter tenure, you will repay your debt faster and pay comparatively lower interest on the borrowed sum. At SBFC, personal loans come with a flexible tenure ranging from 6 months to 5 years.
Conclusion
There are a few ways borrowers can save money on loan repayment through tax deduction. However, remember to check all the qualifying terms to claim the same. In addition, borrowers can further save on their loan repayment by improving their credit score and picking a shorter tenure.
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