Tax Benefits on Business Loans: What Every Entrepreneur Should Know

Business Loan tax benefits help borrowers reduce their tax burdens and optimise cash flow. Alongside, certain business expenses also qualify as tax deductibles under the Income Tax Act in India. This blog delves into these tax benefits on business loans in India, and the qualification criteria for each. Keep reading to know more!

Understanding Business Loan Tax Implications

Under Section 37(1) of the Income Tax Act, business loans are considered as a business expense. As per provisions, the interest payments on money borrowed for business expenses can therefore be counted as a tax deduction. Better yet, there’s no upper limit on how much can be claimed, which means the entire interest amount can be deducted.

This greatly helps entrepreneurs reduce taxable income; however, one main caveat is essential: the expenditure must be wholly and entirely for business purposes only.

The deduction applies to a range of business loans, including:

• Working capital loans
• Machinery Loan
• Term loans
• Overdraft facilities

It’s important to note that only the interest portion of the loan is tax-deductible, not the principal repayment. In addition to the interest, the expenditure incurred for raising a loan can also be counted as a deductible. This includes the registration, stamp charge, and brokerage charges.

Aside from the interest on the Business Loan, there are some other expenditures under Section 37 that offer attractive tax benefits. Keep reading to know more about them.

Also Read: A Guide to Tax-Saving Options Under Section 80C

Tax-Deductible Business Expenses

Any expenditure undertaken for a business is included when calculating the income chargeable under the head “Profits and gains of business or profession” and can be deductible. These expenses must be accrued or paid in the previous financial year to be eligible.

Here are some of the inclusions under business expenses:

• Office Rent: Monthly rent payments for office premises, security deposits (can be claimed as expenses when adjusted against rent), and maintenance charges for rented commercial spaces.
• Employee Wages and Benefits: Salaries and wages paid to staff, provident fund contributions, employee insurance premiums, and bonus and incentive payments.
• Advertising and Marketing Expenses: Expenses incurred on activities for marketing as promotion.
• Business Insurance Premiums: Commercial property insurance, professional indemnity insurance, and business liability coverage.
• Maintenance and Repair Costs: Equipment servicing and repairs, office furniture and fixture maintenance, vehicle maintenance for business use, and IT infrastructure upkeep.

Non-Deductible Components and Expenditures

Note that the following cannot be counted as a deductible:

• Expenditure incurred for the purpose of corporate social responsibility, as per Section 37(1)
• The entrepreneur’s individual expenditures
• Capital expenditure
• Any expenditure undertaken for unlawful activities or those deemed as offences (bribes, pay-offs, etc.)
• Money paid as penalties for violating a regulation or law

Also Read: What is Tax Loss Harvesting? Benefits, Strategy & How It Works

Considerations Before Taking a Business Loan

While tax benefits make Business Loans attractive, several factors require careful evaluation before proceeding:

Loan Purpose and Documentation: Borrowers must ensure the loan is used exclusively for business purposes to maintain tax benefit eligibility. It’s advisable to maintain detailed records of how loan funds are utilised. Keep all invoices, receipts, and bank statements organised for potential scrutiny, and avoid mixing personal and business expenses funded by the loan.

Interest Rate Impact on Overall Cost: Borrowers should compare interest rates across different lenders and consider tax savings when you calculate the net cost of borrowing. Factoring in processing fees, prepayment charges, and other associated costs is essential.

Cash Flow Management: Before taking on the loan, an assessment of the ability to service EMIs without straining operations is crucial. Borrowers should plan for seasonal variations in business income and ensure they can maintain adequate working capital reserves alongside loan repayments.

Compliance Requirements: The business must maintain proper books of accounts and file income tax returns on time to claim deductions. Loan agreements and related documents should be readily accessible.

Also Read: Business Loan vs. Business Line of Credit: Which One Should You Choose?

To Conclude

Business Loan tax implications offer the opportunity to legally and ethically save on tax while boosting a business. However, the process must be followed with discipline and diligence, and maintaining proper documentation is crucial.

If you’re looking for a Business Loan to cover business expenses, then Poonawalla Fincorp offers personalised lending solutions at attractive rates and beneficial terms. Explore all the benefits on the website and apply now!

Frequently Asked Questions

Can I claim tax benefits on a Personal Loan used for business purposes?

Yes, it is possible to claim tax benefits on personal loans used for business purposes. However, proper documentation must be provided to show that the Personal Loan was only used for business-related purposes.

Are processing fees and other loan charges tax-deductible?

Yes, processing fees, legal charges, and other costs directly related to obtaining a business loan are generally deductible as business expenses in the year they’re paid.

What happens if I use part of my Business Loan for personal expenses?

If you use a portion of your Business Loan for personal expenses, you can only claim tax deductions on the portion used for legitimate business purposes. Maintain clear records showing the business use of funds to avoid complications during tax assessments.

Can I claim deductions on Business Loan interest if my business shows a loss?

Yes, you can claim interest deductions even if your business operates at a loss. The loss can be carried forward and set off against future profits, subject to income tax provisions.

How do I prove business loan usage to tax authorities?

Maintain comprehensive documentation including loan agreements, bank statements, invoices for business expenses, and a clear audit trail showing how loan proceeds were utilised for business purposes. This will come in handy as legitimate proof.

Are there any limits on the amount of business loan interest I can deduct?

There’s no specific limit on business loan interest deductions under Section 37(1), provided the expense is wholly and exclusively for business purposes and reasonable in relation to your business operations.