Login to Internet banking
A brand-new experience - smarter, faster, and secured
Introducing the First-in-industry IDFC FIRST Bank's Super Account
Request a Callback
You gain a dedicated partner committed to helping you reach your full potential and achieve new heights
Know More- Account with Auto-Sweep FD
- Account for all Domestic businesses
- Account for Importers & Exporters
- Account for Start-ups
- Accounts for Trusts/Associations/Societies/Clubs
- Account for Merchants
- Account for Agri Traders
- Account for Self-employed professionals
- Special Purpose Accounts e.g. SNRR, RERA, EEFC
BRAVO (Auto Sweep)
Convert the idle funds in your current account into a fixed deposit with the BRAVO feature.
Know More
Zero Forex Markup Current Account
Maximise your savings and boost profitability with our Zero Forex Markup current accounts
Know More
Make more than one online payment in just a few clicks with IDFC FIRST Bank Bulk Payments
Know More
A Card that Powers your Savings & Lifestyle
IDFC FIRST Bank HPCL Credit Card
Most Searched
Earn up to 6.50% interest on your Savings Account
Open Account Now
Download our app
Get instant help for all your queries in one place
Explore Personal
- Accounts
Tools & Calculators
Privilege Program
- Privilege Program
Unlock features, exclusively available
only on the IDFC FIRST Bank app
FinFIRST Blogs
Personal Loan
Do personal loans help tax outgo? Understanding tax implications in India
Key Takeaways
While personal loans don’t inherently come with tax benefits, the deduction on interest depends on how the funds are used.
- Interest on personal loan qualifies for tax deduction if it is used for business investment, purchase of property, or asset creation.
- Proper documentation on utilisation of funds and steering clear of common mistakes and myths helps you make the most of the tax benefits on a personal loan.
Personal loans are often seen as a convenient way to meet various financial needs, from home renovations to emergency expenses. While they are primarily known for their flexibility and quick disbursement, many people are unaware that personal loans can also offer tax benefits in certain situations. This article explores the benefits with regard to tax on personal loans, providing valuable insights for borrowers looking to optimise their financial strategy
READ MORE
Are personal loans tax-deductible in India?
Personal loans are generally not tax-deductible in India, as they are unsecured loans used for personal expenses. However, the way you use the loan proceeds can determine whether you're eligible for tax benefits. It's important to note that the tax deduction comes from the specific use of the funds, not from the personal loan itself.
Tax benefits apply when the borrowed funds are directed to income-linked or asset-creating purposes. You can allocate funds to your financial needs to accommodate tax benefits strategically.
Biggest myths about personal loans and tax benefits
Here’s a look at some of the common myths surrounding tax on personal loans:
Taking a personal loan itself helps save tax
Unlike secured loans tied to a specific purpose, personal loan does not automatically qualify for deductions. The Income Tax Act, 1961, does not reward borrowing alone. The tax benefits apply to the specific usage of funds.
Paying tax using a loan reduces tax liability
You may consider using a personal loan for tax repayment to gain some relief at tax filing time. While this is a way to manage the tax obligation and avoid penalties, it has no bearing on the deductibles.
When interest may be tax-deductible
As highlighted earlier, the usage of a personal loan influences the tax benefits you get. Tax deductions are linked to the interest paid towards specific purposes recognised under the Income Tax Act, 1961, such as:
Home improvement
One of the most common ways to get income tax benefits on a personal loan is by using it for home improvement. The interest paid on the funds used for renovation or improvement is deductible under Section 24(b) up to a limit of ₹30,000 for self-occupied properties. Let-out properties qualify for a full deduction. However, the principal repayment does not qualify for a deduction.
Purchasing or constructing a residential property
If you use a personal loan to purchase or construct a residential property, you may be eligible for significant tax deductions. Like home improvement, Section 24 (b) of the Income Tax Act allows property owners to claim deductions of up to ₹2 lakh per financial year on the interest paid for a loan amount used for purchasing property. Note that the benefit is reduced to ₹30,000 if the construction is not completed within five years from when the amount was borrowed.
Investing in your business
Entrepreneurs and business owners can leverage personal loans for tax advantages by investing the funds in their business. When you use a personal loan for business purposes, the interest paid on the loan can be treated as a business expense under Section 37(1). This approach helps reduce your net taxable profits, ultimately lowering your overall income tax liability. It's a strategic way for small business owners to manage their finances and minimise their tax burden.
Many individuals often use flexible personal loans to fund business expenses. If you are looking to apply for an instant loan, choose FIRSTmoney by IDFC FIRST Bank. It is a 100% digital loan option by IDFC FIRST Bank, offering funds up to ₹15 lakh starting at 9.99% p.a and disbursal in as little as 10 minutes. In case you want to close the loan early, you can do so at zero foreclosure charges.
Asset acquisition and its tax implications
Another lesser-known way to benefit from personal loans in terms of taxes is by using them to purchase assets such as non-residential property, jewellery, stocks, or shares. While the loan itself doesn't provide direct tax benefits, the interest paid on the loan can be added to the cost of acquiring the asset. This strategy can be particularly useful when you sell the asset, as it reduces the capital gains tax you might owe on the sale.
When is interest not tax-deductible
Here are some of the scenarios where tax benefits don’t apply:
Personal or lifestyle spending
Besides the purposes stated above, due to its flexibility, you may also use a personal loan for travel, buying gadgets, weddings, or everyday consumption. These are equally valid reasons, but the interest paid on the funds used for such expenses doesn’t produce taxable income. These are personal needs with no tax relief attached to them.
Medical or emergency expenses
Medical emergencies are one of the most genuine reasons for resorting to personal loans. Despite being a crucial purpose, the interest paid on them is not tax-deductible.
Repaying existing debts
You may take a personal loan to consolidate credit card dues and other obligations like a personal loan for tax debt. While this gives you some financial relief, tax laws don’t recognise them as deductible expenses. The interest paid on loans used for debts does not qualify for deductions, as they are not income or asset-generating activities.
No proof of utilisation
Let’s say you used the personal loan for a purpose that qualifies for tax deduction on interest. You still need to prove the same through clear documentation. This involves maintaining invoices, bank trails, or expense records. If you fall short on proving the utilisation, you may incur issues during assessment, which affects the tax deduction.
Documents required to claim personal loan tax benefits
The loan itself is not assessed for tax deduction, but its usage is ascertained while you file the tax returns. You may have to prove its usage for the eligible purpose. Keep these records to ensure your tax claim stands strong when questioned:
Interest certificate
Lenders provide this document annually to show the total interest paid during the financial year. It is an essential document for the accurate calculation of the interest component while filing returns.
Bank statements
Bank statements give a clear transaction trail from loan disbursal to actual spending of the loan amount. They establish if the funds went toward a qualifying expense to strengthen the credibility of your tax deduction claim.
Loan sanction letter
The sanction letter outlines key loan terms like the loan amount, tenure, interest rate, and repayment terms. It is a formal proof of borrowing and helps tax authorities understand the loan structure.
Proof of loan usage
Expense records like bills, contractor invoices, business receipts, etc., confirm how the funds were utilised.
How to plan a personal loan for tax efficiency
Now that you understand what works and what doesn’t in regard to tax on personal loans, you can take the right steps to plan your borrowing. Here’s how you can leverage the deductions by using the personal loan thoughtfully:
Set a clear financial purpose
You may have a specific purpose for borrowing. Stick to that. While flexibility is a perk with personal loans, defining the usage early on lets you stay on track. This is especially helpful when you use the funds for one of the purposes eligible for tax deduction. When you proceed with clarity, you can manage documentation of utilisation better and avoid mix-up with other expenses.
Choosing a loan option with transparent terms can also simplify your financial planning. For instance, FIRSTmoney personal loan by IDFC FIRST Bank offers clearly defined repayment tenures ranging from 9 to 60 months, allowing you to structure EMIs comfortably.
Consult with tax professionals
While personal loans can offer tax advantages in certain situations, tax laws can be complex and subject to change. It's always advisable to consult with a qualified tax professional or chartered accountant before making financial decisions based on potential tax benefits. They can provide personalised advice based on your specific financial situation.
Balance loan repayment with tax planning
When using a personal loan for tax-saving purposes, it's important to balance the potential tax benefits with the overall cost of the loan. Personal loans often come with higher interest rates compared to secured loans like home loans or education loans. Ensure that the tax savings you're aiming for outweigh the interest costs associated with the personal loan.
When selecting a loan, it also helps to compare interest rates and repayment flexibility. For example, FIRSTmoney personal loan by IDFC FIRST Bank offers competitive interest rates starting from 9.99% p.a. and allows you foreclose loan without charges.
Maintain documentation from day one
Record-keeping is of importance to sort through verification, if required. Preserve records such as interest certificates, payment proofs, expense bills, loan sanction letters, etc. This helps you demonstrate the usage of funds better since the utilisation influences the tax benefits with a personal loan.
Time your borrowing wisely
If you have business investments to make or plan on renovating or buying a property, you can plan your borrowing around these financial goals. This way, the usage automatically aligns with the purpose for tax optimisation. Other, smaller expenses are better managed through your savings.
Final words:
While personal loans may not come with a built-in tax deduction benefit, they can still qualify for a deduction on interest when usage is planned thoughtfully. You want to prioritise the purpose and document the use of funds as you approach the application. Focus on income or asset creation to save on tax with a personal loan. Once you understand the rules and strategise the usage accordingly, you can maximise your tax savings with a personal loan.
Frequently Asked Questions
Can I claim a tax deduction on personal loan interest under Section 80C/24?
Not directly. Section 80C generally applies to principal repayment on home loans, not personal loans. However, you do qualify for a tax deduction on interest paid under Section 24 if the funds are used for purchasing, constructing, or renovating a property.
Do I need to submit documents to the bank to claim tax benefits?
No, tax benefits are claimed while filing your income tax return. You only need to keep the documents supporting the usage of funds ready in case it is asked for verification on the Income Tax portal.
Is a tax deduction for a personal loan available under the new tax regime?
Most deductions linked to loan interest are available only under the old tax regime. Opting for the new regime may limit or make such deductions unavailable.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirst.bank.in for latest updates.
Summarize with AI
