Loans: Income Tax on loan -check all tax benefits available

Income tax benefit on loans

Income tax on loan: Loan is not an option, it has become a necessity now a days. Anyone who is out of capital and want to do anything like marriage, travel buy vehicle, buy house, setup or expand their business takes loan. Now a days all types of loan available in market like marriage loan, travel loan, car loan, home loan, business loan and some other type of personal loan to smoothly run their life. Business Loan is best thing for the entrepreneurs or business people to finance their projects. When the liability to pay comes, the tax benefit also comes with that.

There are different type of loan available like home loan, vehicle loan, car loan, education loan, marriage loan, travel loan, business loan and personal loan. However, all loan benefit cannot be taken under Income Tax. There are 3 types of loan whose benefits are available under Income Tax:

1. Tax benefit on Home Loan

For the majority of Indians, becoming homeowners is one of their biggest dreams. The good thing is that the Indian government has always encouraged home ownership. Schemes, such as Pradhan Mantri Jan Dhan Yojana, making it possible for aspiring homeowners to buy a home. Further, home loan tax benefits are designed to enhance home affordability.

One can take repayment of house loan under Income Tax as follows:

SectionNature of Tax DeductionMaximum Deduction (INR)
Section 80CTax Deduction on Principal RepaymentUp to Rs.1,50,000
Section 24BTax Deduction on Interest PaidUp to Rs.2,00,000
Section 26 read with Section 24Tax Deduction on Home Loan for Joint OwnersUp to Rs.2,00,000 respectively for each of the joint borrowers who are co-borrowers
Section 80EEAdditional Tax deduction of in respect of interest paidAdditional interest deduction of up to Rs.50,000
Section 80EEAAdditional Tax deduction of in respect of interest paidAdditional interest deduction of up to Rs.1,50,000

Read more at : 5 Home Loan tax benefits u/s 24, 80C, 80EE, 80EEA of Income Tax Act

2. Tax benefit on Education Loan

Section 80E of the Income tax act allows you to claim a deduction for the education loan taken from any financial institution or approved charitable institution. Under this section, you can only take a tax deduction for the interest part of the loan. Once you avail of an education loan, the interest paid (which is a component of your EMI) on the education loan is allowed as a deduction under Section 80E of the Income Tax Act, 1961. This deduction is available for a maximum of 8 years or till the interest is repaid, whichever is earlier.

The tax benefit can be claimed by either the parent or the child (student), depending on who repays the education loan to start claiming this deduction. This tax deduction is available only on taking an education loan from financial institutions, not from family members, friends, and relatives. 

There is no limit for Section 80E exemption up to which you can claim the deduction. For instance, if your gross taxable income after other deductions is Rs 7.7 lakh and you repay Rs 2,00,000 as the interest component of the education loan, your total income to calculate income would become Rs 5.7 lakh and taxed accordingly. 

Read Also: Cash Transaction Restrictions & Top 10 High value cash transaction that lead to IT Notice

3. Tax benefit on Business Loan

A business requires certain expenses for operation and maintenance, and those expenses can be marked as business expenses that are used for generating income. Such expenses can be subtracted from the overall business revenue to reach out to the taxable income. One f such expense is repayment of business loan

If the payment is in the form of EMI, which constitutes the part of the principal amount as well as the interest, then please note that only the interest amount will be tax-deductible, not the whole EMI. In other words, the business loan has 2 parts – principal and interest. Principal repayment of loan amount is not an expense of business entity. The interest paid by the borrower every month on the principal amount is tax-deductible and should be shown as a part of the business expenditure. Any business loan, whether term loan, working capital loan, microloan, small business loan, equipment finance, letter of credit, bill discounting, tax benefits, and interest paid on the principal amount, is considered tax-deductible.

The business loan availed by the borrower is not a part of the income and hence should not be a part of taxable income.

There is no upper limit on the interest amount that you can claim as a tax-deductible expense. However, remember that you have to show proof that you have used this amount for business purposes. So, make sure to store all bills and receipts carefully, so that you can avoid any discrepancies with the IT department later on.

Read Also: Tax benefits on business loan in India

Income Tax benefits on Personal Loan

No tax benefits are available for repayment of a personal loan. However, interest paid on a personal loan can be claimed as a deduction depending on the ultimate use of the amount borrowed.

So in case the amount of personal loan has been used for the purchase, construction or repairs renovation of your house property, you can claim the interest under section 24(b) within prescribed limits, provided you are able to conclusively prove that the personal loan was in fact used for the stated purpose. The aggregate of interest on all monies borrowed for the above purpose can be claimed up to two lakhs in a year if the house property is self-occupied.

In case the personal loan has been used for a let out property, entire interest paid can be claimed against the taxable rental income subject to a restriction of set off of losses under the house property head, for all the properties taken together, against other income during the year being restricted to two lakhs. Any loss remaining unabsorbed beyond two lakhs is allowed to be carried forward for set off against the house property income in eight subsequent years. 

Read Also: TDS Rate Chart for FY 2022-23/AY 2023-24 – Income Tax

In case you are carrying on any business or profession and the money borrowed on a personal loan has been used for your business or profession, you can claim the interest paid on such personal loan as business expenditure under Section 37(1). The same can be claimed even if you have taken the personal loan for the purpose of buying any fixed asset like vehicle etc. Deduct the overall interest paid from your gross profit before calculating your tax liabilities. This reduces the net taxable profit of your business, which, in turn, reduces the taxes you pay. 

Please note that no tax benefits are available for interest paid on personal loan used for any personal use like marriage, holidays, travel etc.

What is a Top-Up Home Loan?

A home loan top-up is an additional loan amount that a borrower can get on top of their existing home loan. The maximum loan amount and term permitted by the top-up loan product vary per lender. Customers can get a top-up loan from their existing lender or transfer their money to a new lender via a balance transfer.
Taking up a top-up loan is preferable to taking out a personal loan because it has a lower interest rate and requires less documentation. As a top-up loan, one can obtain up to 70% of the property’s market value.

  • Unlike a regular home loan, which allows for a maximum deduction of Rs 2 lakh on interest payments, if the top-up loan was used for repairs and alterations, the maximum deduction possible is Rs 30,000.
  • Only a self-occupied house is subject to the Rs 30,000 limit. There is no limit to the amount of deduction that one can claim if the repairs and renovations were done on a rented property.

Read Also: Income Tax and GST on Money Transfer Business

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