The personal loan market in India is expected to grow at the rate of 10% between the financial years 2020 and 2025, a recent study has revealed. The borrower-friendly benefits of this financial product like restriction-free usage, quick disbursal, etc. have contributed significantly in propagating this growth.
While applying for this financing product, one should also be informed of the income tax benefit on personal loan. It will help them to claim income tax deductions while preparing their ITR at the end of a financial year, thus maximising savings.
Know more about income tax benefits on personal loans
A point to note here is that, unlike other methods of advance, there is no direct provision for income tax exemption on personal loans, be it on interest or principal repayment. However, there is leeway to that, and the details have discussed below –
When investing in residential property
In case borrowers use the personal loan funds for the purchase or construction of a residential property, they are eligible for income tax deductions. In this regard, individuals can claim tax benefits on interest payments under Section 24 of the IT Act.
There is, however, a cap on this deduction, and borrowers can only claim up to Rs.2 lakh for self-occupied properties. Furthermore, to claim this exemption, one needs to obtain a certificate from the lender, which will certify that this amount will be used for the said purpose.
When invested in any asset
Borrowers can also save on tax payments if they divert their instant personal loan towards investing in any asset. If they have made any investments in jewellery, specific stocks, non-residential property, etc., the interest paid on this case will be added to the cost of acquisition of that asset. It will then reduce the capital gains on that asset during its resale.
However, individuals cannot claim the tax deductions on the interest paid in the year that they procure this asset. Instead, they can do so in the year they sell that particular investment. Moreover, there is no upper limit to the tax deduction here; thus, investors can sell their investment for capital gains and deduct their cost of acquisition according to the Section 48 of the Income Tax Act.
Apart from tax benefits, a personal loan offers a host of other benefits that can help an individual meet various financial requirements. Here are some examples –
- Debt consolidation: This financing method is a perfect tool for debt consolidation. With its high loan amount and flexible repayment tenor, one can easily manage his/her outstanding without any issues.
- Travelling expenses: Individuals can apply for personal loan for travel to meet an array of expenses like ticket booking, accommodation etc.
- Home renovation: Individuals can also use the funds availed to meet home renovation expenses.
- Higher education: Borrowers can opt for a personal loan for education to support higher education as well. With a loan amount of up to Rs.25 lakh from Bajaj Finserv, they can meet other expenses outside the tuition fees.
Further, the availability of pre-approved offers from this financial institution streamlines the loan application process and saves time. It is available on other financial products like business loans, credit cards, etc. Borrowers can check their pre-approved offer by submitting their essential contact details.
Tax benefits on personal loan may be limited, but it certainly helps individuals enjoy additional savings on their yearly income tax return. However, one must go through the fine print carefully before signing a personal loan agreement to ensure that they can optimise their borrowing experience.
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