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How to Avail Tax Benefits on a Personal Loan (3 Possible Ways)

Published on Jan 24, 2020Updated on May 21, 2024

How to Avail Tax Benefits on a Personal Loan (3 Possible Ways)

Personal loans are among the most accessible ways to raise finance for various purposes. For example, a personal loan can be a great help when you need to fund higher education, tackle a medical emergency or plan a large expense like a dream wedding. You can also claim personal loan interest deduction based on the purpose of the loan.

Personal loans are unsecured, and therefore lenders consider them riskier than secured loans. This means personal loans attract a higher interest rate. That said, the ease with which these loans can be availed and the freedom to use the amount for any purpose you like makes them ideal in many situations.

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?

Let us look at how to calculate the loan amount you are eligible for. The easiest way to do this is through our personal loan eligibility calculator. The loan amount that you can get depends upon your income, credit history, employment history, and repayment capacity. Our personal loan eligibility calculator would provide you with an instant estimate on the personal loan amount available based on:

  1. Your location
  2. 2. Your age – you should be at least 21 years old at the time of application and not more than 65 years old on loan maturity
  3. 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?

Area of deduction

Section of Income Tax Act

Max. deductible amount

Conditions

Principal amount

80C

INR 1,50,000

Possession of housing property must be retained for 5 years at least before sale

Interest

24B

INR 2,00,000

Only purchase or construction loans allowed with a limit of 5 years for completion of construction

80EE

INR 50,000

Loan must be above INR 3,00,000 and property value must be less than INR 50,00,000

80EEA

INR 1,50,000

Stamp value of property must be less than INR 45,00,000

Stamp duty

80C

INR 1,50,000

Claims possible only in the same year as expense

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us

FAQs

Can I get a tax exemption on a personal loan?

The purpose of the loan will play a key role in deciding whether you can get tax exemption on personal loan or not. In case loan is taken for purposes like business expansion, education or renovation of home, one may get exemption considering the provisions of Income Tax Act. One has to however ensure to maintain necessary documents and file ITR on time.

Can I show my personal loan in ITR?

Your income tax return can include your personal loan. Personal loans for tax-deductible purposes like higher education, home remodeling, or business expansion can be deducted. Sections 80C and 24 of the Income Tax Act provide tax relief. The loan amount, purpose, interest, and tax advantage must be provided.

Is Form 16 mandatory for a personal loan?

Personal loans do not require Form 16. An employer gives an employee Form 16 with income, TDS, and other information. Income tax returns are its main usage. Personal loans require identity, residence, income, and bank statements. Salary slips, bank statements, or tax returns can prove income.

Can a person file ITR without Form 16?

ITRs can be filed without Form 16. An employer gives an employee Form 16 to report income, TDS, and other information. Income tax returns are its main usage. With salary slips, bank statements, and other income verification papers, you can file your ITR without a Form 16. Salary slips can be used to compute income and taxes for salaried employees.

Can we use Form 26AS instead of Form 16?

Yes, Form 26AS can replace Form 16 for income tax returns (ITR). Form 26AS is an annual consolidated statement that lists TDS, TCS, and other tax payments made by an individual throughout the financial year. Form 26AS is a consolidated statement of the Income Tax Department's tax information, while Form 16 is an employer's certificate to employees. Form 26AS can be used to verify employer and other deductor tax deductions when filing an ITR.

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