A personal loan is an unsecured credit product offered to salaried and self-employed individuals by banks, Fintech lenders, P2P lending platforms or private financial institutions and credit co-operatives.
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Personal loans come in handy during phases of monetary shortfalls, and loan amounts offered can be as high as Rs 2500,000. Common parameters that lenders evaluate while processing loan applications include – an individual’s credit score, repayment history, income, employment stability and total outstanding debt.
Considering the potential for large ticket sizes, the question of whether or not personal loans are tax saving credit instruments is often posed. We’re adequately aware that home loans are tax-saving instruments owing to large ticket sizes, and a major chunk of a home-loan bearing individual’s income goes into the EMI payments.
But do personal loans help you save on tax too? Well, the answer to this depends on what you use the loan amount for.
As such, there is no specific mention in the Indian Income Tax Act about personal loans helping individuals to save tax. However, the interest paid is exempt from tax if the loan amount is used for any of the following purposes:
If you use your personal loan to construct a residential property, you are eligible for tax deductions on the interest component of your loan. Under section 24(b) of the Indian Income Tax Act, you can claim tax benefits of up to Rs 200,000 on interest paid towards the loan. This holds true if you decide to live in the house you’ve just constructed.
If you observe, personal loans aren’t particularly tax saving instruments like home loans or education loans. Depending on what you decide to use your loan amount for, you will be eligible for tax exemptions under corresponding, relevant sections of the Indian Income Tax Act.
Aditya Kumar is founder and CEO of Qbera.com.
First Published: Jan 4, 2019 6:05 AM IST
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