When it comes to emergency funding, a personal loan perhaps can be one of the brilliant options. And as the name suggests, personal loans can be used for any personal financial needs. Whether it is dealing with unexpected bills, emergency medical expenses, home renovation, funding higher education, a dream wedding, or investing in a business, a personal loan can always come to your aid.
Personal loans are an unsecured type of credit, meaning you will not have to pledge any collateral to avail of funding. The easy access, flexibility, and no specific pre-determination of end-use make a personal loan one of the best sources of funding for salaried and self-employed individuals than other types of loans.
Many individuals question whether there are any tax benefits associated with the personal loan. In this article, we will look at how a personal loan can benefit small business owners in terms of tax benefits.
Table of Contents
Can You Get Tax Exemption On Personal Loans?
Personal loans are the smart way to manage a wide range of significant expenses because there are no restrictions on their use. A personal loan also does not come with any special tax advantages. However, there are some scenarios in which you can claim tax benefits on a personal loan in India under specific sections of the Income Tax Act.
The main factor in determining whether or not you are eligible to receive the benefits is how you intend to use the loan amount. You can claim these benefits as long as you can demonstrate that the funds were used for the specified purpose.
Home Renovation, Purchase or Construction
If you utilise the funds availed from a personal loan to renovate or repair your home, you will be eligible for a tax deduction under Section 24(b) of the Indian Income Tax Act. Up to ₹2 lakh can be deducted from taxable income for interest paid on a personal loan for residential house repairs, renovations, or reconstruction.
Furthermore, if you use the loan to buy or build a home, you can also take advantage of the tax benefits. Section 80C of the Income Tax Act allows for a deduction of up to ₹1.5 lakh per fiscal year for the principal repayment of a personal loan used to buy or build a residential house.
Education Expenses
If you take out a personal loan to pay for your, your spouse’s, or your children’s education, you can claim a tax deduction for the interest component under Section 80E of the Income Tax Act of India. However, this deduction can only be claimed for a maximum of eight years or until the loan is repaid, whichever comes first.
How Can A Personal Loan Help Your Business?
Can I use the funds from a personal loan to start or fund my business? This is a common question that people ask when it comes to business and personal loans. The answer is YES. Because personal loans have no predetermined end-use purpose, you can use the funds to start a business, fund emergency expenses, purchase new machinery, expand your business, and so on.
In comparison to a business loan, which requires a significant amount of paperwork and processing, personal loans are more flexible and easier to obtain. When compared to a business loan, the eligibility criteria for a personal loan are also quite simple, making it easily accessible for you.
Starting a business requires significant capital, and obtaining a business loan can be difficult because lenders require a lot of information, such as business plans and an extensive amount of documents. Business loans often require collateral, whereas personal loans are collateral-free, making them an excellent choice for aspiring business owners or small business owners who do not have assets to pledge.
Tax Benefits of Personal Loan For Business
If you take out a personal loan and use the funds to start or invest in a business, you may be able to claim tax benefits on the interest paid as a business expense under Section 37 and Section 36 of the Income Tax Act of India. This can assist business owners in reducing their net taxable profits and thus lowering their income tax liability.
Overview Of Tax Benefits On Personal Loan
Here is a quick overview of all the different tax deductions and exemptions available for personal loans:
| End-use of the fund obtained from personal loan | Implication | Exemption Limit |
| Construction or purchase of a residential property | Section 80C allows you to claim a deduction for loan principal repayment. | Up to Rs. 1,50,000 |
| Purchase, construction improvement, or renovation of the residential property | Section 24 allows for the deduction of loan interest. | Up to Rs. 2,00,000. |
| Starting a new business or investing in a business. | Lowers net taxable income. | No Limits |
Case Study: How a Tech Startup Strategically Uses a Personal Loan for Working Capital
Ashish, the founder of a Bangalore-based technology company, was facing a cash crunch in the early stages of his business. His start-up had several promising clients in the works. However, Ashish required immediate funds to cover operational costs such as employee salaries, rent, and software development fees.
Because the company was still in its early stages, Ashish found it difficult to obtain a business loan from banks. Due to time constraints, he took out a personal loan of ₹3 lakhs to cover the business’s working capital requirements. The loan was quickly approved, and the funds became available within a few days.
Loan Utilisation and Tax Deductions:
Ashish used the personal loan to cover expenses such as salaries, office rent, and software licenses.
Because Ashish used the personal loan to directly fund the business’s operational expenses, he could deduct the loan interest as a business expense. Ashish paid 13% interest on the loan for two years, amounting to ₹39,000 per year. His accountant ensured that the loan’s interest was deducted from the company’s taxable income.
Calculation Example:
- Loan amount = ₹3,00,000
- Annual interest @13% = ₹39,000
- Total interest over two years = ₹78,000
Ashish saved ₹78,000 in taxable income by claiming the interest deduction over two years. This represented significant savings for the start-up, which was still in the early stages of profitability.
Maximize Your Tax Benefits: Expert Tips
To fully leverage the tax benefits of a personal loan, you must plan strategically. Let us look at some ways to maximize the tax benefits and ensure your business benefits from the loans you take.
Consult a Tax Advisor:
Tax laws can be complex. Sometimes what may seem simple often involves complex and specific conditions. In this case, hiring a tax advisor or CA can be a wise decision. They can walk you through the complex nuances of tax benefits available under the Income Tax Act of India, helping you understand which loan types are best for you, which loans are eligible for deductions, and how you should structure your expenses to maximize your savings.
Regularly Reviewing Financial Statements:
To claim tax deductions, you must provide clear evidence that the loan was used for business purposes. Maintaining proper records, such as receipts and invoices for purchases made with loan funds, loan agreements, and other financial statements demonstrating how loans were used within the business will allow you to claim deductions without difficulty during audits. Thus, regular review of your financial statements is very crucial.
Regularly reviewing your financial statements not only allows you to claim deductions without complications during an audit but also helps you identify potential tax deductions. Furthermore, keeping an eye on your financial statements means keeping an eye on your cash flow. Keeping an eye on your cash flow allows you to plan and help you improve your future financial position.
Planning Loan Usage Strategically:
The way you utilise your loan can significantly impact the tax benefits you’re eligible to claim. For example, if you use the loan for business expansion, you may be able to claim interest deductions and asset depreciation benefits. By planning loan utilisation, you ensure that every rupee of the loan is put to good use and maximizes your business growth potential.
Conclusion
Personal loans are not just a flexible source of funding for personal needs. Personal loan tax breaks are available, but only in certain circumstances, such as the construction or purchase of a residential property, home renovation, education, or business purposes. Personal loans, when used properly, can be a strategic financial tool for small business owners that significantly reduces the tax burden by lowering taxable income.
If the intended use of your loan is eligible for tax benefits, you should consult your lender or a tax professional. Make sure you have enough proof to show how you used the proceeds of your loan so that you can claim the available deductions and exemptions. With the right approach, a personal loan can fuel your business growth while offering long-term financial advantages.
A personal loan can help your business grow while also providing long-term financial benefits if approached correctly. Before deciding on a personal loan, make sure you understand all of the terms and conditions involved. If you are still unsure, contact Kreditbazar, and our in-house financial experts will provide you with excellent financial consultation and services, assisting you in achieving your financial objectives.
