Tax Benefits on Personal Loans: Deductions and Exemptions

Introduction to Tax Benefits on Personal Loans

Personal loans are a convenient way to finance a wide range of expenses from debt consolidation and medical emergencies to weddings and travel. Unlike mortgage or auto loans, they do not require collateral, making them an attractive option for many borrowers. However, similar to such loans, can we show personal loans in Income Tax and claim deductions or exemptions?

In this article, we will explore the potential personal loan tax benefits and understand the specific scenarios where deductions on personal loans can apply. Understanding these tax implications will help you gain insight into how to maximise the personal loan tax benefits and possibly save money during tax season. If you are considering taking out a personal loan, you will also learn about the factors that influence loan eligibility and some helpful tools that will help you estimate your chances of loan approval.

Understanding Personal Loan Tax Implications

Generally, the principal amount of a personal loan is not considered taxable income, meaning you do not have to pay taxes on the loan amount received. Other associated fees and costs such as processing charges are also typically non-taxable and must be factored into the overall cost of the loan. It is important to remember that this only applies when you take a loan from traditional financial institutions or recognised NBFCs. If you take a loan from other sources like a family member, it may be considered a part of your income and can be taxed as such.

Thus, claiming personal loan tax benefits is not as straightforward as claiming them on home loans. Deductions on personal loans can be applicable for interest payments, but only in certain circumstances such as using the loan for business or home improvement. We will cover these scenarios in detail in later sections to better understand how you can avail of the tax benefits of borrowing personal loans.

Is the Personal Loan Amount Taxable?

Remember that the personal loan amount that you raise is not a part of your income. This means you would not pay any income tax on the loan amount. That said, remember that this applies only when you take a loan from a bank or recognised NBFCs. If you take a loan from other sources like a family member – it may be considered a part of your income and can be taxed as such.

Tax Benefits on Personal Loans

There are no tax benefits on personal loans since they aren’t taxable. Also, the personal loan amount isn’t a segment of your salary structure or income, so one can’t file income tax returns on the same. You are free of the trouble of paying any income tax when you apply for a personal loan. 

However, one thing you must remember while applying for a personal loan is to reach out to a legitimate lending institution, as loans from an unknown source could be considered as a part of your income. The following are a few examples

1. Loans for Purchase of a Home / Home renovation

Personal loan tax exemption for salaried is not available even if you use the funds towards purchasing a new home or renovating your existing home. However, the home loan you may have taken to purchase a home is certainly exempted from taxes. If it is a house that you own and live in, you are eligible for deductions up to ₹2 lakh. If it is a rented house, the total interest paid on the loan can be deducted from your taxable income. Make sure that you keep all the relevant documents that prove how the loan amount was used before claiming the tax benefit.

2. Loans taken for Business Purpose

Term loans for business which are secured against assets such as land, securities or other property is exempted from taxes up to an extent. However, personal loans for business or unsecured business loans don’t carry any tax benefits.

3. Personal Loan for Purchase of any other Asset

Besides residential property, there are various income-producing or investing assets like shares, gold, jewellery, cars, two-wheelers, or non-residential house property. If you need funds for any of these purchases, you can apply for the appropriate product to avail the tax benefits against the same. However, personal loans taken even for these purposes are not eligible for tax benefits.

Points to Remember

1. A personal loan is not considered a part of your income and is, therefore, not taxable.
2. There are no tax benefits on personal loans.
3. Only certain loans which are secured and for specific purposes have tax benefits, such as a home loan or secured business loans.

How to Calculate Personal Loan Eligibility?

Before you can claim personal loan tax benefits, it is essential to apply and qualify for a personal loan. To do so, you need to meet certain eligibility criteria. Let us take a look at some of the most important factors that affect personal loan eligibility and the tools that can help you prepare a strong loan application:

1. Your location
2. Your age – you should be at least 21 years old at the time of application and not more than 65 years (at the time of loan maturity)
3. Your net monthly income. Remember this is your income after the tax has been deducted. In case you are self-employed, your profit after tax would be used instead
4. Any monthly EMIs that you are currently paying

Remember that this is just an indicative figure, and the actual amount that you are eligible for will be determined after a thorough check by the lender.

How to Avail Tax Benefits on a Personal Loan?

Factors Influencing Personal Loan Eligibility

Credit score, income, existing financial obligations, age, and employment history have the most impact on eligibility. Let us look at these factors in detail:

1. Credit Score: A reflection of your creditworthiness, a score of 750 or above indicates a lower risk for lenders which may lead to better loan terms and interest rates. However, the minimum threshold for credit scores can vary across lenders.
2. Income: A stable source of income, such as salaried employment in a creditable organisation, reassures lenders of your repayment ability and improves your eligibility.
3. Debt-to-Income (DTI) Ratio: A lower DTI ratio of 30% or below suggests that you have a manageable level of debt relative to your income, making you a more attractive borrower.
4. Age: Lenders often check if borrowers have sufficient income potential throughout the loan. You should ideally be above 21 years of age when applying and not be close to retirement age at the time of loan maturity.
5. Employment History: Longer periods of stable employment show your ability to generate consistent income, making you a more reliable borrower in the lender's eyes.

Personal Loan Calculators

Tools such as a personal loan eligibility calculator and an EMI calculator can help you plan finances efficiently.

1. Personal Loan Eligibility Calculator: This tool gives you an estimate of the maximum loan amount you may be able to borrow. It takes into account factors such as age, location, net income, and existing obligations to provide a realistic estimate.
2. Personal Loan EMI Calculator: This tool gives an estimate of the monthly payments you can expect, based on the loan amount, interest rate, and loan tenure.

Using both tools and trying out different inputs can help you arrive at the loan amount and tenure that best suits your needs. Please note that the final loan amount and interest rate will be decided by the lender based on your eligibility.

Conclusion

It is possible to secure income tax benefits on personal loans, but only in specific scenarios such as using the loan amount for home renovation/construction or education. It is advisable to consult a financial advisor or your chosen lending institution to understand whether your personal loan can qualify for tax benefits.

SMFG India Credit can help you choose the best personal loan solution that suits your needs and potentially provides tax benefits. Check out our simple personal loan eligibility requirements and apply today!