The world of personal loans has evolved significantly, thanks to user-friendly online platforms and mobile apps. Beyond being a quick financial fix, applying for a personal loan can also be leveraged strategically to reap tax advantages. This article will explore how savvy borrowers can employ personal loans while optimising their tax planning.
Revamping Your Home
A smart way to leverage tax benefits from a personal loan is by channelling it into home renovation. According to Section 24(b) of the Income Tax Act, the interest on a personal loan used for home repairs or renovations is deductible. You can claim deductions up to Rs 30,000 per year.
Applying for personal loans can be deployed to finance educational pursuits, whether your higher education or your spouse, children, or dependent relatives. Section 80E of the Income Tax Act extends a tax deduction on the interest paid on personal loans for education purposes. Remarkably, there’s no upper limit on the deductible interest amount.
Taming Multiple Debts
A personal loan can come to your rescue when you find yourself entangled in a web of high-interest debts, such as credit card dues or other loans. By consolidating these debts, you simplify your repayment and become eligible for tax deductions on the interest paid, thanks to Section 80EE of the Income Tax Act. The maximum deduction allowed here is Rs 2,00,000.
During medical emergencies, personal loans can be a financial lifesaver. Under Section 80DDB of the Income Tax Act, you can claim deductions on the interest paid for personal loans taken to treat specified critical illnesses. The extent of deductions can vary based on the actual medical expenses incurred.
Fueling Business Ventures
Entrepreneurs and self-employed individuals can strategically employ personal loans to fuel their business expansion. The interest on such loans can be considered a legitimate business expense, potentially reducing your taxable income.
While personal loans offer tax advantages when utilised for specific purposes, it’s helpful to keep a few essential points in mind:
1. Loan Documentation:
Make sure to maintain comprehensive documentation of how you utilised the loan. It includes retaining invoices, receipts, or bills relevant to the loan’s purpose (e.g., renovation, education, medical treatment).
2. Focus on Interest:
Tax benefits primarily apply to the interest component of the personal loan, not the principal amount.
3. Lender Selection:
When seeking a personal loan, factor in interest rates, processing fees, and repayment terms. Opt for a lender offering competitive rates and terms to maximise your gains.
4. Loan Tenure Matters:
Longer loan tenures can translate to lower EMIs but might reduce the overall interest deduction. Assess the loan tenure in alignment with your financial objectives.
In conclusion, personal loans in India serve as a financial lifeline for addressing immediate needs and carry valuable tax advantages when strategically employed.