Tax Benefit on Business Loan

Do Business Loans Come with Tax Benefits?

A Business Loan is an unsecured loan from a lender to a borrower, intended to cater to the needs of a Business. Business loans do not directly have any effect on the amount of taxes owed. As per the Income Tax Act 1961, money that is borrowed does not qualify as income in a business. Therefore, the interest on the business loan is tax-deductible, but the principal amount is not.

In India, business loans are subject to interest rates, and their interest rates are defined as an expense that the borrower must pay in return for borrowing money from the lender. Specifically, interest charges are fees associated with borrowing money from a lender for business purposes. There are tax benefits associated with interest charges. So, let us examine the following tax benefits on business loans in India that can encourage a business owner to take a loan.

  • Interest paid is tax-deductible and can be recovered as business costs.
     
  • Business expenses are those that are incurred while managing the business and can be deducted from total income to determine the amount of tax.
     
  • This is a great way for small business owners who want to reduce their tax liability while growing their businesses.
     
  • The business loan interest rate varies by lender and is classified as an expense due to the loan cash being used for commercial activities. As a result, interest on loan repayments is claimed as a tax-deductible expense.
     
  • Interest paid is deducted from gross revenue when calculating your business income tax. Keep a close eye on your business loan and submit proof to the Income Tax authorities on request.
     

The Principal Amount Is Not Tax-Deductible

The principal amount of the business loan is not tax-deductible. Therefore, you cannot deduct this amount from your overall business revenue when calculating your taxes. The reality is that your business or firm does not earn the principal amount. The money is received through a lender and must be repaid. As a result, it cannot be considered revenue for your business. This means that the amount of the company's debt cannot be deducted from your gross revenue. Additionally, it’s not required that you should pay tax on this amount.

Which Expenses Are Tax-Deductible?

Traditionally, the net profit of a business for the financial year is taxed. This net profit or revenue is determined after subtracting certain essential expenses from gross income. Income tax bars or brackets are progressive, the higher the net income, the higher the taxation. Therefore, all expenses must be carefully deducted from gross income to minimize taxation.

EMI on business loans are items that can help you reduce your income tax liability. They can have a significant effect on reducing your taxable income. Therefore, it is important to research interest rates, processing costs, and other loan-related charges before you apply for a business loan. Obtaining this information can help you determine the tax benefits offered by a Business Loan.

What Are the Tax Benefits That Can Be Availed Under Business Loan?

Funding acts as the lifeline of the firm, keeping it afloat and productive. Business loans are financial instruments designed to meet the monetary needs of a business. From meeting working capital requirements to purchasing inventory and paying employees to paying rent for an office or industrial space, a business loan can help you with everything. As a result, a business loan is vital to the growth of a particular organization. Taking a business loan in India has many benefits for the borrowers, including the following.

  • To help SMEs, the government has launched several lending schemes with highly flexible terms and conditions and of course low-interest rates.
     
  • As a business expense, the interest on business loans is tax-deductible.
     
  • Business loans for new businesses are widely available and offer borrowers flexible repayment options, which makes loan repayment a bit simpler.
     
  • Calculate your tax liability by subtracting business expenses from total business revenue.
     
  • To qualify for the interest deduction, you must meet specific basic criteria established by the lender.
     
  • Because the lender considers the business loan to be financing rather than income, it is not tax-deductible.
     
  • The amount repaid as EMI is not tax-deductible.

List Of Other Benefits of Business Loans In India-

  • No collateral is required

    Organization loans are a wonderful source of funding because they do not require collateral or security. If the business is not successful or faces difficulties, the owner need not fear losing the asset or the firm.
     
  • Quick funding

    Due to the lack of documentation requirements of the lender, instant business loans get approved quickly. The approval process is easy, efficient, hassle-free, and convenient. Additionally, you can easily complete the loan application process online, which saves you time and effort.
     
  • Increased loan amount

    Since no collateral is required, and thus, the size of the loan is not limited, you can apply for a larger unsecured business loan. In comparison, if you apply for a secured business loan, you will only be approved for an amount equal to the value of the collateral.

Business loan eligibility

Business loans can be availed by MSMEs, SMEs, Entrepreneurs, Small Business Owners, Artisans, Traders, Retailers, Manufacturers, Private Limited and Public Limited Companies, Sole Proprietorship, Partnerships Firms, Limited Liability Partnerships, etc. The following are the eligibility criteria for Business Loan from Poonawalla Fincorp:

  • Age Criteria: Minimum age of 22 years at the time of loan application and a maximum of 62 years at the time of loan maturity
     
  • Loan Amount: Minimum Rs. 1,00,000 and maximum Rs. 30 lakhs
     
  • Repayment period: 12 months to 36 months
     
  • CIBIL/Credit Score: 650 or above
     
  • The applicant must be an Indian citizen with no previous criminal record
     
  • Business existence: Minimum 3 years from the date of incorporation
     
  • Turnover of the company: minimum annual turnover of Rs. 20 lakh

Conclusion

It’s worth noting that the principal amount is not tax-deductible. The funds which are borrowed do not generate revenue for the business. Only the borrowed amount will be repaid over the repayment period agreed between the borrower and the lender. Principal repayment is the process of repaying the amount borrowed. Therefore, borrowed money is not considered revenue, and returning it is not considered an expense. In addition, it is not tax-deductible.

Getting a business loan today has become easier due to the use of new technology by the banking sector and non-banking financial companies. Financing is readily available and can help your firm expand and reach new heights.

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