Personal Loan Tax Benefit: Maximise Your Savings

Personal Loans can help cover expenses such as weddings, education, home renovation, or medical emergencies. They are unsecured, easy to obtain, and require minimal documentation, though they typically carry higher interest rates. Many borrowers, however, are unaware of their tax implications.

Unlike home loans or education loans, tax benefits for personal loans are not widely known. This blog explains tax deductions, interest payments, eligibility, and key tax considerations to help you manage your tax liability effectively.

When Do You Get a Tax Benefit on a Personal Loan?

Personal Loans generally do not come with direct tax benefits. However, if the loan is taken for certain purposes, you can claim tax deductions by providing proper evidence to the Income Tax department. Here are the main scenarios:

Home Renovation

If the loan is used for home renovation or repairs, you can claim a tax deduction under Section 24(b). You are eligible for up to ₹2 lakh per year on the interest paid for a self‑occupied property.

Home Purchase of Construction

Loans taken to purchase or construct a house qualify for a tax deduction on interest paid. For a self‑occupied property, the deduction is up to ₹2 lakh per year.

• Condition: Construction must be completed within five years from the end of the financial year in which the loan was taken.
• Reduction: If construction is not completed within this period, the deduction limit is reduced to ₹30,000 per year.
• Let‑out property: If the property is let out, the entire interest amount is eligible for deduction without any upper cap.
• Principal repayment: Repayment of the loan principal qualifies for deduction under Section 80C, up to ₹1.5 lakh per year.

Education Expenses

Loans taken for the education of yourself, your spouse, or your children are eligible for deduction under Section 80E. Only the interest paid qualifies, not the principal. The deduction can be claimed for up to eight years or until the loan is repaid, with no upper limit on the interest.

Business Purpose

If the loan is used for business or investment, the interest paid can be claimed as a business expense under Section 37.

Purchase of an Electric Vehicle

Loans used to purchase an electric vehicle may qualify for a deduction under Section 80EEB, up to ₹1.5 lakh. However, this benefit was only available for loans sanctioned between 1 April 2019 and 31 March 2023. It is no longer applicable for new loans after this date.

Mistakes to Avoid While Claiming Tax Benefits

Claiming tax benefits on Personal Loans requires careful planning. Many borrowers make mistakes that prevent them from availing tax deductions or reduce the amount they can claim. To ensure you maximise your Personal Loan tax benefit and avoid unnecessary issues with the Income Tax department, here are the common mistakes to watch out for:

Assuming All Personal Loans Are Tax-free

Not all Personal Loans qualify for tax deductions. Only loans taken for eligible purposes, such as education expenses, business purposes, home renovation, or home purchase, can provide tax benefits.

Using the Loan for the Wrong Purpose

To claim a tax benefit, the loan must be used strictly for eligible purposes. Using it for other personal expenses will disqualify you from claiming any tax deduction.

Not Keeping Proper Documents

Proper documentation is essential to justify your expenses. Without supporting documents, the Income Tax department will not allow any tax benefit.

Also Read: Personal Loan Eligibility Calculator 2025: Check in 2 Minutes

Documents Required to Claim Personal Loan Tax Benefits

To claim tax deductions on a Personal Loan, maintain the following documents:

• Loan agreement with the lender.
• Account statement showing loan disbursement.
• EMI repayment receipts or bank statements reflecting payments.

Proof of End usage:

• Home Renovation: Bills, invoices, contractor receipts
• Business Purposes: Books of accounts, purchase invoices
• Education: Fee receipts, admission letters

These documents are crucial to ensure you can legally claim tax benefits and effectively reduce your tax liability.

To Conclude

Personal Loans help cover expenses such as education, home renovation, home construction, or business expenses. Though they don’t have direct tax benefits, using them for eligible purposes allows you to claim tax deductions. Remember that benefits depend entirely on the loan’s end use, not on the loan itself. Using them wisely can help maximise your tax savings.

Poonawalla Fincorp offers quick, flexible Personal Loans with minimal documentation, making it easy to manage expenses while maximising potential tax benefits. Connect with us today for more details!

FAQs

Can I claim tax relief for Personal Loan interest?

There is no direct tax relief on Personal Loans. However, if the loan is used for eligible expenses, you may be able to claim tax deductions on the interest paid. These eligible purposes include:

• Home Renovation
• Home construction or Home Purchase
• Business Expansion
• Education

Is a Personal Loan covered under Section 80C?

Yes, if the Personal Loan taken is used for house purchase or construction, then it is covered under Section 80C. Interest payment qualifies for deduction under Section 24, but loan repayment qualifies for deduction under Section 80C.

Which documents are required to claim interest deduction under the Income Tax Act?

You shall get an interest certificate from the lender to claim interest deduction on the loan.

Is the principal amount of a Personal Loan taxable in India?

The principal amount received on Personal Loans is not considered income. Hence, it is not taxable under the Income Tax Act in India.

Can a self-employed person claim a Personal Loan tax benefit?

Yes, a self-employed person can claim interest paid as a business expense as long as the loan is used wholly or partly for business purposes.