Generally, Personal Loans give you no tax benefits. However, if the money borrowed is used for certain purposes, then an exemption is made. Here’s all you need to know.
Unlike a Home Loan, a Personal Loan will not give you tax deductions, exemptions or benefits. This is because a Personal Loan is normally used to meet contingencies, purchase of home appliances or for meeting other personal needs. Ideally, you should not be taking a loan to meet these needs. You should have a fund for contingencies and should save up using a Fixed Deposit or Mutual Funds for purchasing products for your home. But if you want tax benefits for your Personal Loan, you should be for one of the below-listed reasons.
Buying A House
As you might know, Section 80C and Section 24 deal with tax benefits for Home Loans. You get a tax deduction for the interest repaid on the borrowed capital under Section 24 and the principal repaid can be claimed under Section 80C. While under Section 24, the tax limit is Rs. 2 lakhs for both let-out and self-occupied properties, the maximum limit is Rs. 1.5 lakhs under Section 80C. Now that you know, let’s get back to Personal Loans.
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It is a common misconception that only Home Loans qualify for this tax benefit. However, if you take a Personal Loan to purchase a house, you can claim tax benefits that apply to a Home Loan. However, you should be able to prove that you used it to buy a house. For example, you could have used a Personal Loan to make the down-payment for your house. In this case, you can claim tax benefits. You must furnish proof at the time you claim tax benefits.
Note that section 24 and 80C do not specify the type of loan you should take to avail tax benefits. As long as you are able to prove that you used it for buying a house, you can claim deductions under these sections. That is why even loans borrowed by friends and family can be used to claim tax deductions under Section 24 as long as you can show that you used that money to buy a house.
However, just like for Home Loans, in case you are yet to construct the home, you can claim tax benefits for that Personal Loan only after the construction of the house is complete.
Renovating A House
The tax benefits that apply to buying a house also apply to renovating a home. This will include repairs and improvements to the house. What will this include? This could include improvements such as building a new balcony, adding a room to the house, adding a floor to the house, extending already existing rooms, painting of the house, relaying of tiles or floor and all other things covered under a Home Improvement Loan. Some of them even cover plumbing and alarm systems. However, this doesn’t include buying products such as furniture and appliances for the house.
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If you use the Personal Loan for renovating or remaking your house, avail tax benefits under Section 24. However, you cannot claim benefits under Section 80C. Also, note that the tax deduction under Section 24 is restricted to Rs. 30,000 a year for home renovation. This is for self-occupied properties. For let-out properties, the tax deduction is limited to Rs. 2 lakh per year. In this case too, proof will be required to claim tax benefits.
For Business Owners
In case you own a business and took a Personal Loan in the name of your business, you can claim this as an expense. In this case, the interest amount can be claimed as the expense. This will be deducted from your business profits and will reduce your taxes.
If you used a Personal Loan to purchase any assets such as shares, this can be added to the cost of acquisition. This will reduce your tax burden.
Now that you know that Personal Loans have tax benefits, use them for the right purposes, save that proof and claim the benefits. But since Personal Loans come with high-interest rates and many terms and conditions, you should compare across lenders to find the right one for you.