When you apply for a personal loan, then you get immediate funds to cover many needs without restrictions.
Having the creditworthiness for the personal loan for medical emergencies and other needs means that you can get fast approval and at a lower rate.
What few borrowers are aware of is that they can also avail the tax benefit on personal loan.
Yes, that’s very much possible! And it depends on the way you use the loan amount.
Let’s take a quick look at the tax benefit on personal loan in 2020 in this post!
Here’s how you can pocket tax benefit on personal loans in 2020
1. When you use the loan amount for home improvement
Another way to avail the tax benefit on personal loans is when you use the money for home renovations. Under the section 80C of the Income Tax Act, you are eligible for a tax deduction of up to Rs.1.56 lakh. It is based on the principal amount that you have repaid in the fiscal year.
2. When you use the loan amount to buy or construct a residential property
If you use the sanction to either purchase or build residential property, then you can enjoy some tax deductions as well. It is for the interest paid within the financial year. If your property is self-occupied, then you can get up to Rs.2 lakh deductions. And it can help you pocket bigger savings. If you have let out the same property, then there is no higher limit on the claimed deductions. But to ask for a successful claim, you need to get it certified by your lender earlier.
3. When you use the loan money in your business
One of the key benefits of availing the personal loan is that you can use the money for the business as well as personal expenditures. If you want to avail the tax benefit on personal loans, then one of the ways is using the money in your business. If you invest a part or the entire amount into any legal business, then you can avail tax benefits. If you are self-employed, then you can enjoy the deduction on the paid interest. For such a claim, there is no upper limit. And it depends on the interest payments for the financial year.
4. When you use the loan figure to buy some assets
The final provision of using the personal loan amount to get tax savings is when you use it to invest in an asset. These assets can be in the form of stocks, non-residential properties, shares, jewellery and other valuables. Your paid personal loan interest charges in every EMI get added to the acquisition’s cost. In turn, it reduces the capital gains at the resale time. During the resale only, you become eligible to deduct the acquisition cost, and it includes interest as per section 48 of the IT Act.
You are now well aware of the ways you can pocket tax benefits on personal loans. It is a viable model to enjoy tax savings based on the way you use the loan money.
But if you use it as the emergency loan, then no such tax advantages can be enjoyed.
Thus, if you have some tax benefits in mind, then you can use a part of the loan for purposes as discussed.