Personal Loans are unsecured loans, which are ideal for the situations when the individual needs funds but doesn’t have a property or security to give as a collateral loan for the amount. Generally, Personal Loan is not taxable and one can claim the income tax benefits on the Personal Loan, if the individual has used it in order to acquire, construct, repair, or reconstruct a property. As the individual does not provide an asset as security, the personal loan interest rates might, however, be higher than the interest which is charged for secured loans. However, it is thus easy to apply and then gets approved for the Personal Loans if an individual is salaried. Self-employed individuals can also avail of Personal Loans if they can provide proof of income from their business.
The article below however tells us about the tax benefits of the Personal loan.
Loans are never considered a part of individual’s income, so the Personal Loan loan will not be considered as a taxable fund when an individual is filing IT returns. This means that the individual won’t be paying taxes on Personal Loans. However, the loan has to be from a valid source such as a bank or any other financial institution as loans from an unknown source and it may be considered as income while an individual is computing taxes.
An individual can actually claim tax benefits on Personal Loans in some cases. Regardless of the loan’s source, if an individual can prove that he has used the loan for a valid expense, he can actually use the Personal Loan for tax saving and can then claim tax deductions on the interest paid on the loan.
Your House and Your Personal Loan
Employing the Personal Loan for individual’s house can do wonders if he is aiming to avail of tax deductions. Section 24(b) of the Income Tax Act provides relief to the home buyers, giving them tax deductions on the loans that are taken to buy a residential property or to renovate it. If an individual uses the Personal Loan towards the down payment for the purchase of a house, then he can claim tax exemption. If he uses the loan amount to pay for home repairs, renovation, or for reconstruction, all these are also considered valid expenses for a tax deduction.
An individual cannot claim a deduction on the principal amount of the loan, but the interest which is paid on the loan can be utilized for a tax deduction. If he is living in the house on which he spends the money taken as loan, you can claim a tax deduction for interest amount up to Rs.1,50,000. For a house that has been rented, there is thus no limit on the interest amount that can be claimed.
If the individual has purchased a house that is under construction, he cannot claim the deduction until after the construction is completed. Also, the house should be ready to occupy within three years of taking the loan.
Individual must preserve all the documents which are needed to provide proof that individual has used the loan amount on a house. If he has used the amount which is used to carry out repairs or renovations, he must preserve the bills for materials and labor. These are thus needed to claim tax deductions.
Personal Loans are thus great options to handle urgent requirements for funds. They can also be used as a tax saving instruments if used as properly.
This article has been contributed by Shruti Kakkar, Content Writer, LegalRaasta- an online platform for GST Software, personal loan, GST registration, etc.