There are certain types of loans which provide tax benefits to taxpayers, like home loan and education loan. However, it is not usually known that you can avail tax benefits on some other types of loans also.
There are certain types of loans which provide tax benefits to taxpayers. For instance, home loan and education loan. However, it is not commonly known that you can avail tax benefits on some other types of loans also, provided some conditions are met and loans are used for some specified purposes.
For example, if the money is used for the purchase or construction of a piece of property, then the interest paid can be claimed as an exemption under Section 24 of the Income Tax Act.
“Sky-rocketing property prices and, not to mention, delays in possession of under-construction property have increased skirmishes of homebuyers to meet the down payment requirement. Individuals sometimes resort to personal loans to fulfil the down payment commitment and, thus, end up paying heavy interest on such loans,” says Gopal Bohra, Partner N. A. Shah Associates LLP.
Thankfully, interests paid on personal loans are allowed as deduction under the Income-Tax Act in some cases.
Section 24 is titled as ‘Deductions from Income from House Property” and income from house property is computed after reducing interest paid on borrowed capital for acquisition, construction, repair, renewal or reconstruction of a house. Currently, in case of self-occupied property, maximum deduction of interest up to Rs 2,00,000 is available and this amount includes proportionate interest (1/5th) of the total pre-acquisition interest, if any, and post possession interest.
“Section 24 does not distinguish between the types of loan, whether it is a personal loan or a home loan taken from a financial institution. There is no stipulation as to who should be the lender. Therefore, interest on personal loans obtained from relatives or friends can also be claimed as a deduction,” says Bohra.
It should, however, be noted that the principal amount repaid on the personal loan cannot be claimed as deduction under Section 80C of Income-Tax Act, unless the loan was taken from a bank or other prescribed lenders.
Thus, “one can save substantial tax by taking deduction of interest paid on personal loans taken from friends and relatives. However, the Income Tax Department may question the need for such borrowing and payment of interest,” informs Bohra.
Apart from the above, tax benefits on personal loans can be claimed if the loan has been taken for the following two purposes:
# Amount Invested for Business Purpose: If the loan amount is invested for the purpose of any business, then the interested paid can be claimed as a business expense.
# Amount invested for the purchase of any other asset: “If the amount is invested for the purchase of any asset other than property, then the interest paid would be added to the Cost of Acquisition. This will reduce the capital gains at the time of sale which will in turn will reduce the tax liability,” says Karan Batra, Founder & CEO of CharteredClub.com.