Personal loans are a great way to get money when you don’t have something valuable to use as security. Even though the interest rates on personal loans are higher compared to loans with collateral, you might be able to get some tax benefits depending on how you use the loan.
Here’s how you can claim tax benefits on your personal loan:
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1. Interest payments benefit
The interest you pay on a personal loan can actually give you some tax relief, thanks to Section 24(b) of the Income Tax Act. For example, you take a personal loan to renovate your home. In this case, you can claim deductions of up to Rs 30,000 annually on the interest payments. If your loan is for pursuing higher education abroad, the entire interest amount is eligible for deductions.
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2. Business use benefit
Did you know that if you use a personal loan for your business, you can claim deductions on the interest payments? This is covered under Section 36(1)(iii) of the Income Tax Act. Let’s say you decide to invest in your business by purchasing specialized equipment or increasing your inventory. The cool part? There’s no upper limit on deductions, meaning you can claim the entire interest amount.
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3. Property addition or renovation benefit
Personal loans can be handy for renovating or expanding your existing house. If the terms of a traditional home loan aren’t fitting or if you’re living in a rented house, a personal loan might be the way to go. Section 24(b) of the Income Tax Act allows you to claim exemptions on interest payments for property additions or renovations. For instance, if you decide to add a room to your house or renovate your terrace, you can claim exemptions on the interest payments. If you own the house, you can get up to Rs 2 lakh per year in exemptions. Living in a rented house? You can even claim the entire interest amount.
It’s very important to fully understand the terms and conditions of your personal loan before making any decisions. So, the next time you’re thinking of a personal loan, consider these tax benefits and choose the option that aligns best with your financial goals.
