When can one claim tax benefits under personal loans?

Personal Loans are unsecured loans, which are ideal for the situations when the individual needs  funds but doesn’t  have a property or security in order to pledge for the amount. Generally, Personal Loan is not taxable and one can claim the income tax benefits on the Personal Loan, if the individual has  used it in order to acquire, construct, repair, or reconstruct a property. As the individual does not provide an asset as security, the personal loan interest rates might, however,  be higher than the interest which is charged for secured loans. However, it is thus easy to apply and then gets approved for the Personal Loans if the individual is salaried. Self-employed individuals can also avail of Personal Loans if they can provide the proof of income from their business.

The article below however tells us about the fact as to when can one claim tax benefits under the Personal loan.

Loans are never considered a part of individual’s income, so the Personal Loan will not be considered as a taxable fund when an individual is filing IT return. This means that the individual won’t be paying taxes on Personal Loans. However, the loan has to be from a valid source such as a bank or any other financial institution as loans from an unknown source and it may be considered as income while the individual is computing taxes.

An individual can actually claim tax benefits on Personal Loans in some cases. Regardless of the loan’s source, if an individual  can prove that he has used the loan for a valid expense, he can actually use the Personal Loan for tax saving and can then claim tax deductions on the interest paid on the loan.

Your House and Your Personal Loan:

Employing the Personal Loan for individual’s house can do wonders if he is aiming to avail of tax deductions. Section 24(b) of the Income Tax Act provides relief to the home buyers, giving them tax deductions on the loans that are taken to buy a residential property or to renovate it. If an individual uses the Personal Loan towards the down payment for the purchase of a house, then he can claim tax exemption. If he uses the loan amount to pay for home repairs, renovation, or for reconstruction, all these are thus also considered valid expenses for a tax deduction.

Individuals cannot claim a deduction on the principal amount of the loan, but the interest which is paid on the loan can be utilized for a tax deduction. If he is living in the house on which he spends the money taken as loan, you can claim a tax deduction for interest amount up to Rs.1,50,000. For a house that has been rented, there is thus no limit on the interest amount that can be claimed.

If an individual has purchased a house that is under construction, he cannot claim the deduction until after the construction is completed. Also, the house should be ready to occupy within three years of taking the loan.

Individual must preserve all the documents which are needed to provide proof that individual has used the loan amount on a house. If he has used the amount which is used to carry out repairs or renovations, he must preserve the bills for materials and labor. These are thus needed to claim the tax deductions.

Personal Loans are thus great options to handle urgent requirements for funds. They can also be used as a tax saving instruments if used properly.

By | 2018-01-08T09:33:53+00:00 November 4th, 2017|Personal Loan|0 Comments

About the Author:

Pulkit Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Pulkit is a veteran CA with over 10+ of experience.

Leave A Comment