Personal Loan Tax Benefit: Guide on How to Claim and Save

A Personal Loan can provide quick access to funds for emergencies, weddings, home repairs, or business needs. It offers fast financial support when you need it most. Many people also wonder whether Personal Loans come with any tax benefits.

Personal Loans do not have direct tax exemptions under the Income Tax Act. However, using the loan for certain purposes may allow you to claim tax deductions. This blog explains how you can save tax when using a Personal Loan.

Are Personal Loans Taxable?

A Personal Loan is not treated as your income. This means you do not have to pay income tax on the loan amount you receive. This rule applies only if the loan is taken from a bank or a recognised Non-Banking Financial Company (NBFC). If you borrow from friends, relatives, or unregistered sources, the money may be treated as income and taxed.

Tax Benefits of Personal Loans

A Personal Loan does not give direct tax benefits like a home loan or an Education Loan. You usually cannot claim tax deductions on the loan amount or the interest paid.

However, if you use the loan for specific eligible purposes—such as business expansion or property renovation/construction—you may claim deductions on the interest paid. Important correction: Personal Loans do not qualify for Section 80C deductions (principal repayment) or Section 24(b) deductions (housing loan interest) unless the loan is explicitly used for home renovation/construction and you can prove usage.

If you use it for personal purposes, such as holidays, weddings, or other debts, the interest cannot be claimed for tax purposes.

Also Read: Personal Loan Tax Benefit: Maximise Your Savings

Eligibility Criteria for Claiming Tax Benefits on a Personal Loan

To claim tax benefits on a Personal Loan, you must meet certain conditions and keep all required documents ready.

• You must be able to show proof of how the loan was used to claim tax deductions under the Income Tax Act.
• You should have a steady income to support your loan repayments.
• Keep all documents, such as interest certificates and bank statements, to support your claim.
• The loan must be taken from a recognised bank or NBFC, not from friends, relatives, or unregistered sources.
• Only Indian residents can claim these tax benefits.
• Tax benefits on Personal Loans are usually available under the old tax regime.

Deduction Limits on Personal Loan Tax Benefits

The deduction limits depend on the loan purpose and tax regime. Knowing them helps you save tax.

• Education Loan benefits under Section 80E apply only to education loans from recognised financial institutions, not Personal Loans.
• For business expansion, you can claim a deduction only for the actual interest paid. This reduces your taxable business income.
• For property renovation or construction, interest on a Personal Loan may be deductible under Section 24(b), but principal repayment is not eligible.
• These deductions are generally available only under the old tax regime.
• Always check the latest rules under the Income Tax Act to know the correct deduction limits for your situation.

Using a Personal Loan for House Property

Tax benefits under Section 24 (interest) and Section 80C (principal) apply only to registered home loans, not Personal Loans.  If you use a Personal Loan for home renovation or construction, you may claim interest deduction under Section 24(b), but principal repayment and stamp duty/registration charges are not deductible.

How to Claim Tax Benefits on a Personal Loan

Here’s what you need to know to claim tax benefits when using a Personal Loan for eligible purposes.

1. Clearly show how the Personal Loan was utilised.
2. Keep all bills, receipts, and bank statements related to the expenses.
3. These prove the loan amount and interest paid.
4. Accurate reporting is essential to claim any applicable deductions.

Without proper documentation and proof, you cannot claim any tax deductions on a Personal Loan.

Maximising Tax Benefits on Personal Loans

You can save tax on a Personal Loan if you use it the right way. Follow these steps and keep all necessary documents to make sure you can claim tax deductions and reduce your taxable income.

• Use the Personal Loan only for purposes that give tax benefits.
• Keep all documents, like interest certificates and bank statements, safe.
• Proper documentation is needed to claim tax deductions under the Income Tax Act.
• Check the tax regime you are under. Tax benefits on Personal Loans are usually available under the old tax regime.
• Know the eligibility criteria, deduction limits, and tax rules to better plan your finances.

For big loans or complex cases, consult a tax advisor to make sure you get all available tax benefits and save the maximum taxable income.

To Conclude

Personal Loans do not have direct tax benefits; however, they can still help you save tax if used wisely. Using the loan for business or property renovation/construction may allow you to claim deductions on interest paid. Principal repayment of Personal Loans is never tax-deductible. With a Personal Loan, you can manage your urgent needs and, in certain cases, reduce your taxable income.

Make smart money choices with a Personal Loan from Poonawalla Fincorp. Get up to Rs. 50 Lakh with quick approval, simple documents, and flexible tenure to manage your needs with ease. 

FAQs

Can I claim tax benefits on Personal Loan interest every year?

Yes, if the loan is used for house property or business purposes, and you meet the conditions under the Income Tax Act.

Is the principal repayment of a Personal Loan tax-deductible?

No, principal repayment does not qualify for tax deductions under any section.

Are tax benefits available under the new tax regime?

No, interest deductions related to Personal Loan usage are not allowed under the new tax regime.

Can pre-construction period interest be claimed on a Personal Loan?

No, this benefit applies only to home loans. Personal Loans do not qualify.

Do joint borrowers get separate tax benefits on a Personal Loan?

No, joint borrowers cannot claim separate deductions on Personal Loans. This applies only to home loans.