Personal loans are a popular financing option in India, especially during financial emergencies. These unsecured loans don’t require collateral and can be availed for various purposes, such as medical expenses, education, marriage, travel, or debt consolidation. However, personal loans usually come with high interest rates than other loans, which can add to the repayment burden.
However, if you have taken a personal loan, you may wonder if you can claim the interest paid as a tax deduction. The answer is no, you cannot avail tax benefits typically. However, there are certain purposes for which your personal loan might be eligible for tax exemptions.
Let’s explore the scenarios where you can claim personal loan interest as a tax deduction.
Personal loan taken for business purposes: You can claim the interest paid on loan as a business expense. The interest paid on the loan can be deducted from the business income, reducing your taxable income. However, you need to ensure that you have proper documentation to support the business purpose of the loan.
Personal loan taken for higher education: If you have taken a personal loan to finance your higher education, you can claim the interest paid on loan as a tax deduction under Section 80E of the Income Tax Act. The tax deduction is available for a maximum of 8 years or until the repayment of the loan, whichever is earlier. However, the loan should have been taken from a financial institution or a charitable trust and not from a friend or a relative.
Personal loan taken for home renovation: Under Section 24(b) of the Income Tax Act, you may deduct the interest paid on a personal loan you took to remodel your house. The deduction is available for up to Rs. 30,000 per annum if the home renovation is self-occupied. There is no limit if the house is rented out.
To claim the tax deduction for personal loan interest, you must maintain proper documentation, such as a loan agreement, repayment schedule, and interest certificate from the lender. You also need to file your income tax returns on time and provide the necessary details while filing.
How to find the best personal loan?
While a personal loan may not provide you with the tax benefits you are looking for, except under certain circumstances, such type of loan is particularly helpful when faced with a financial exigency. To opt for a personal loan that best suits your needs, you need to do your due diligence while researching different lenders and their policies. To further make a robust financial plan, it is prudent to make use of a personal loan EMI calculator to check which lender’s policies and interest rates best suit your needs.
To wrap up
While personal loan tax exemptions are available, they are limited to certain instances. It is recommended to consult with your lender or a tax professional to confirm if the purpose of your personal loan qualifies for tax benefits and the accordingly undertake financial planning.