Tax benefits on personal loans: Which personal loan expenses are tax-deductible?

Can you get tax benefits for personal loans? While personal loans, unlike home loans, do not outright qualify for tax benefits, if you use it for home construction, purchase or renovation, you can claim deductions on the interest paid. Similarly, you can get tax benefits on the interest paid on personal loans used for meeting education expenses. You can also get deductions for interest paid on personal loans used for business purposes.

“While personal loans are usually unsecured, and payment of interest is not necessarily tax-deductible, it is the use of the loan proceeds that comes into play for any possible tax advantages,” says Mukesh Pandey, director, Rupyaa Paisa, a portal that reviews loans.

Under ‘Section 80C of the Income Tax (IT) Act’, the principal repayment of a personal loan taken for the purchase or construction of a residential house is eligible for a deduction from taxable income. You can claim a deduction of up to ₹1.5 lakh in a financial year.

The interest paid on a personal loan taken for the purchase or construction of a residential house is also eligible for a deduction from taxable income of up to ₹2 lakh under ‘Section 24(b) of the IT Act’. But to claim the deduction, the property must be self-occupied. However, the entire interest paid on the loan qualifies for tax deduction if the property is let out for rent.

“If (personal loan is) used for buying, building, or renovating a home, interest paid is deductible,” says Harsh Bhuta, Partner, Bhuta Shah & Co LLP, a Chartered Accountants’ firm. Borrowers can claim deduction only if they opt for the old scheme under IT, he says

Similarly, personal loans taken for home renovation or repairs are eligible for a tax deduction as per ‘Section 24(b) of the IT Act’. This provision allows deductions of up to Rs. 30000 annually on the interest paid for the loan. In all cases, you should own the property to claim the deductions.

If a personal loan is taken for meeting the higher education expenses for self, spouse, or children, the entire interest paid can be claimed as a deduction under ‘Section 80E of the IT Act’. It will be available for a maximum of eight years or until the loan is closed, whichever is earlier. But you have to justify that the loan expenses are a part of the overall education expenses. Interest paid on loans for higher education qualify for deductions only under the old scheme, Bhuta says.

For personal loans used for business purposes, the interest paid can be written off as an expense under ‘Section 37(1) of the IT Act’. This deduction lowers the taxable income from your business and thus reduces the overall tax liability. You can use the funds for buying specialised equipment for your business or stocking up inventory.

Documentation requirement for claiming deductions

To claim the deductions, you have to provide documents that show that you have used the loan for the specified purpose. For example, you can provide the tuition fee receipt from the educational institution to prove that you have used the personal loan for education purposes.

No tax benefits for personal expenses

“No tax benefits apply if the loan is used for personal expenses like travel, wedding, car loans or medical emergencies,” Bhuta says.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.