Personal Loan: Many individuals may have obtained a personal loan, yet they might be unaware that income tax exemptions can also apply to such loans. Are you aware that tax exemptions are available for personal loans? If not, allow us to clarify. Typically, personal loans do not qualify for tax exemptions in the same manner as other types of loans. However, in certain specific circumstances, deductions can be claimed.
Tax exemptions
If a personal loan is utilized for the purchase, construction, or renovation of a home, one can claim a deduction on the interest payments under various sections of the Income Tax Act, including 80C, 24B, and 80E. Additionally, if the loan is used to cover educational expenses, tax deductions may also be applicable. Furthermore, deductions can be claimed for expenses related to business activities. While there is no direct tax exemption for personal loans, using the funds for designated purposes allows for interest deductions.
One can claim a tax exemption on the principal amount of up to Rs. 1.5 lakh
For instance, if a personal loan is taken to buy or construct a house, one can claim a tax exemption on the principal amount of up to Rs. 1.5 lakh under section 80C for a single financial year. In cases where the property is self-occupied, an exemption of up to Rs. 2 lakh on interest payments can be claimed. If the property is rented out, the entire interest amount can be exempted. It is essential that the loan proceeds are genuinely utilized for the construction, purchase, or repair of the property. In situations where the loan is used for renovations or repairs, an interest payment exemption of up to Rs. 30,000 can be claimed under section 24B, applicable only if the property is owned by the borrower.
If a personal loan is taken for the higher education of oneself, a spouse, or children, interest payments can be exempted under section 80C. This exemption can be claimed for a maximum of eight years or until the loan is fully repaid, and it applies solely to interest payments, with no exemptions available for the principal amount. Exemption on loan for business If you use a personal loan for business expenses, then under section 371, the interest can be shown as business expenses.