Are Personal Loans Tax Deductible?


A personal loan is a convenient mechanism of raising funds in the situation of a financial crisis. It is an unsecured type of funding, and hence, you need not offer any collateral to the lender. Instant loan approval and disbursement through an online platform has made this loan one of the most sought after funding tool.

Some features of a Personal loan  

Personal loan offers many special features to the borrower, like:

  • The comfortable and straightforward application process
  • The personal loan documents are very few, like proof of age, income proof, confidential identity document, residential proof, and CIBIL score.
  • Quick approval and disbursement can help resolve your money crunch at the earliest.
  • You enjoy the freedom to use the loan amount for any end-use, without any restrictions from the lender
  • You can decide the tenure and the mode of repayment depending upon your convenience.
  • Can you enjoy tax benefits on a personal loan? 

Under normal circumstances, you can not avail any tax benefits on your loan. As the loan amount is not a part of your income, you are not paying any tax on the loan amount. But, in some exceptional cases, the interest that you spend on this loan funds can enjoy tax benefit and can help you save on your annual tax payments.

  • Tax benefits on a personal loan?

Tax benefits on Personal loans depend on its end-use. The Income Tax Act of India allows tax deductions if you use the loan amount for business expansion or diversification, education purpose, and renovation or purchase of a home.

  • When should you use Personal Loan for Business purpose?

When you use the personal loan funds for the business expansion or other business-related activities, the interest payment on the loan becomes the liability. In this case, the interest amount goes down as an expense. Due to this, it gets a deduction from the net profit of the company. Your loan interest also enjoys tax deduction if you have spent loan amount to purchase any vehicle for the business purpose.

  • When do you use a personal loan to buy or construct a Residential Property?

It is due to the provision in Section 24B of the Income Tax Act. According to this Section, the interest that you pay for personal loan funds can enjoy deduction from the net taxable income, if the loan amount is for construction, purchase, or renovation of the residential property. However, you need to submit all the personal loan required documents which can prove that you have purchased these properties with your loan amount. You may get a tax deduction of maximum up to Rs 2 lakhs if the house is a self-owned home. For the rented house, the total interest amount on a personal loan enjoys tax benefits.

  • When are personal loan funds for to Purchase Assets?

When you purchase an asset like jewellery, debentures or shares, from the personal loan amount, you cannot claim the tax benefits. However, the interest amount that you pay gets added to the cost of procuring that asset. Hence, if you ever think of selling it, the interest amount will be deducted as part of the acquisition cost from the capital gains, thus, reducing the net taxable income.

  • When should you use a personal loan for education purpose?

The interest on a personal loan which you use to fund any educational activity enjoys tax benefit under section 80D. There is no upper ceiling to the total amount of interest that gets tax deduction in this case.

Tax benefit on the personal loan is subject to its end-use. You can avail this benefit if you use your loan amount for these specific purposes and purchases.