Personal loans are unsecured loans with no clear purpose or objective of usage. While home loans can only be used to buy homes and car loans can be used only for buying cars, personal loans can be used for any purpose the borrower desires. While these loans are very helpful in meeting financial expenses, not all personal loans can claim tax benefits. Some criteria and eligibility requirements must be met before personal loans become eligible for tax benefits. Please keep reading to understand the tax implications of taking personal loans for business or education.
Tax Implications of Taking Personal Loans for Business Purposes
The biggest advantage of taking out a personal loan for business usage is that the interest paid can be claimed as a deductible business expense under Section 37 of the Income Tax Act. This means that the interest amount can be deducted from the business’s gross income before calculating the taxable income. This helps in reducing the overall tax liability of the business. However, to claim this benefit, the borrower must be able to prove that the loan was used exclusively for business purposes and not for any personal or non-business use. The borrower must also keep all the relevant documents, such as loan agreements, bank statements, invoices, receipts, etc., to substantiate the claim.
Unlike home or education loans, personal loans do not offer any tax benefit on the principal repayment. Personal loans do not require to be backed by any kind of collateral or security as they are unsecured loans. As such, the principal amount of a personal loan does not offer any tax benefit or deduction to the borrower. Therefore, the borrower must repay the principal amount of a personal loan from their income or savings and cannot claim any tax relief on it.
Tax Implications of Taking Personal Loans for Educational Purposes
As mentioned above, personal loans do not offer any tax benefit on the principal repayment as it is not tax deductible and does not offer any tax benefit to the borrower.
However, taking a personal loan for educational purposes means the interest paid can be claimed as a deduction under Section 80E of the Income Tax Act. This deduction is available only for the interest portion of the EMI and not for the principal portion. The borrower can claim the deduction for up to eight years or until the loan is repaid, whichever comes first. The deduction can be claimed for the education of self, spouse, children or a student for whom the borrower is a legal guardian. However, the loan must be taken from a bank, financial institution, or approved charitable institution to claim this benefit; loans obtained from friends or relatives are not eligible. This benefit applies solely to loans intended for higher education, which includes any course of study undertaken after passing the senior secondary examination or its equivalent exam, whether in India or abroad. The criteria include vocational and regular courses, and the borrower must also provide a certificate from the lender showing the amount of interest paid during the financial year.
How to Calculate Home Loan EMI
It is very important to calculate home loan EMI before taking out a home loan. Learning to calculate home loan EMI helps borrowers to understand how much they will need to spend on their monthly repayments and help them plan their monthly budgets effectively. Many online web tools help borrowers to calculate home loan EMI quickly and effectively. While many of these online tools to calculate home loan EMI offer free but limited services, others provide paid but much more powerful and comprehensive features. The online tools to calculate home loan EMI are very accurate and provide precise calculations instantaneously using the loan amount, home loan interest rate and loan tenure. Knowing to calculate home loan EMI and the home loan interest rate can be very beneficial for borrowers to make responsible financial decisions.
Conclusion
While personal loans are not eligible for tax benefits on the principal amount, using them to finance business or educational ventures can make the interest amount eligible if the borrower can prove their usage with the proper documentation. Personal loan interest amounts used for business purposes are eligible for tax benefits under Section 37 of the Income Tax Act. In contrast, personal loan interest amounts used for educational purposes are eligible for tax benefits under Section 80E of the Income Tax Act. Borrowers should always calculate home loan EMI using the home loan interest rate before taking a home loan to help them understand if it is within their means.
