A personal loan is a credit balance loaned to one by any financial institution. Although taking a loan for any reason is sure to impose a burden of interest on you, it can come with certain benefits regarding tax payment requirements. In this article, we will give you a detailed overview of how this works, along with a step-by-step explanation of how you may claim your legal tax benefits if you have taken a personal loan.
What is a personal loan?
A personal loan is an unsecured financial credit provided by a financial institution without any collateral attached, after verification of factors such as employment history, repayment capacity, income level, profession, and credit history. However, it is a loan and hence subject to interest charges. A personal loan is unsecured and thus considered a risk-filled investment by most lenders. Thus it incurs higher interest rates.
Why get a personal loan?
- A personal loan of some amount can be a strategy to organize a financial plan capable of generating profit in the long run.
- Moreover, it is possible to reap tax benefits if you take a personal loan, making it a future-proof action to some extent.
- A personal loan may provide sustainability during a financial crisis, a necessary boost for a new business project, the ability to purchase something on an emergency basis, and many other pressing financial assistance.
- You may also claim interest benefits on a personal loan depending on the loaned amount in some instances.
- A personal loan can be taken with much ease at almost any point of time you wish to avail of it. You also have the legal freedom to use that money in any way you want.
Tax application on personal loan:
Since a personal loan is not considered as income, it generally does not get calculated by the Income Tax department into the payable tax for the individual. It must be loaned from a registered bank or an NBFC.
If one, however, loans the money from an institution not recognized by the financial system or from a friend or family, it will be considered as personal income and taken under the purview of taxation.
How can tax benefits be availed on personal loans?
As explained earlier, personal loans are unsecured against any fixed asset or estate and hence not considered by tax investigations. As such, they cannot in themselves help one reap tax benefits.
However, under a provision of the Income Tax Act, 1961, a personal loan will be taxable once implemented in particular projects. Therefore it will enable one to utilize the tax benefits like deductions and exemptions applicable to those projects.
- If the personal loan has been used to fund a business venture directed towards revenue generation, the borrower may claim tax reduction on the interest payable for the original loan.
- If the personal loan is used to construct real estate or renovate existing housing structures, then the borrower is eligible to claim a tax rebate on the personal loan, as stated in section 24(b) of the Income Tax Act, 1961. In this scenario, a maximum amount of ₹ 30000 belonging to the interest that will be paid as the personal loan repayment can be claimed as considered deducted from the total amount of income calculated as taxable by the Income Tax department.
- The borrower is also eligible to reap tax benefits if the personal loan money is used to purchase a pre-existing residential property. In this scenario, an amount of up to ₹ 200000 can be exempted from the income money calculated as taxable by the Income Tax department.
- The interest paid on the personal loan may also be considered tax benefits while investing the money in stocks, gold, jewelry, non-residential housing, etc. This is so because such assets can be considered as properties capable of generating profits in the long run by the banks and other institutions.
Important points to keep in mind while applying for a personal loan, keeping tax benefits in mind:
- In order to avail of additional income tax benefits using a personal loan, one must make sure to register the money as an investment recognized as fixed or secure by the financial system. It may be one of the options listed above or some other acquisition considerable as such a fixed or secure asset.
- One must always check thoroughly their eligibility to apply for a personal loan. Money View is one excellent website with a lucid user interface that can be very helpful in evaluating one’s eligibility for personal loans. One simply needs to visit the site and put in the relevant information as prompted, and the built-in analysis system on the website will calculate your eligibility.
- One must have a well-structured plan prepared in advance to utilize the borrowed amount in a way that allows them to bring the money under the purview of tax benefits.
- While applying for tax benefits on eligible projects funded by the personal loan, one must have all the pertinent receipts, bonds, loan details, documents, bank papers, investment details ready to be served at a moment’s notice as evidence to the Income Tax department. This is crucial to avoid any legal complications and consequent repercussions.
How to use a personal loan eligibility calculator?
To calculate the amount of money one is eligible to receive from the bank as a personal loan, one needs to consider certain facts and figures regarding their income, credit history, employment history, and repayment capacity.
After visiting an online eligibility calculating site such as Money View, one needs to access the tool they offer to make the necessary assessments. There one has to provide information regarding:
- Their location,
- Age (only adults over 21 years of age are legally eligible for personal loans, and the maturity period for the loan must end before they turn 57),
- Income source as salaried or self-employed,
- Average monthly income quantity (it is required to be at least ₹ 13500),
- CIBIL score (a minimum of 600 is required) or Experian score (a minimum of 650 is required).
Upon receiving the data, the calculator will estimate the amount you may receive at current financial rates. However, it is vital to understand that this is a rough approximation. The final, absolute quote will always be made by the lender only after they check the information from their end.
The option of a personal loan is chosen by many as a kind of last resort because of the higher interest rates applied to these loans. However, if the money is strategically applied after it is borrowed, it will be able to generate an appropriate revenue stream.
Additionally, in the long run, it may also provide additional exemptions from taxation as long as the investment lies legally under the provisions stated in the Income Tax Act, 1961.
So if a personal loan is taken with a set target and smart expenditure in mind, it is possible to turn it into a very profitable financial plan by the loaner.