Finance

Are Personal Loans Considered Income & Taxable?

Are Personal Loans Considered Income & Taxable?

Personal loans are not just financial instruments that make your expenses easy, they are your emergency fund, from which you can get credit at a reasonable interest rate. Though the personal loan is common today, there are still some confusions that surround it.

One major dilemma around a personal loan is whether it is considered an income and if yes, then is it taxable? Let us answer this question and clear any doubts you might have.

Is A Personal Loan Considered Income?

Personal loans can be used for all your expenses like wedding, home repair, education and many more. They are an unsecured loan option that does not require any collateral for approval. Income is considered money that one earns through a job or an investment. Loans however do not fall into this category, as it is borrowed with the intent of paying back. You can apply for personal loan here: https://www.fullertonindia.com/personal-loan.aspx

Is Personal Loan taxable?

While preparing your paperwork for filing the income tax, you might have confusion about whether to include your personal loan in it too. As stated earlier, a personal loan is not an income, so you are not required to mention it in your tax form. There can be certain cases, where you might have to face some tax implications due to the loan.

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As long as you are ensuring to keep on track with the repayment of the loan, you need not worry. However, if you are unable to repay your loan on time, then you may be listed as a defaulter. In such cases, you will have to work out a payment plan or a portion of your loan may be cancelled.

Along with this, the lender also issues a cancellation of debt (COD), which signifies that you are not responsible for paying the loan back, and a 1099-C form, which has to be submitted with your tax return when you file and report the cancelled amount.

Are Interest Payments Tax-deductible?

Some loans come with tax-deductible interest payments, as there are no restrictions to the usage of the personal loan amount, it is generally considered being a non-tax deductible. You can, however, avail of some tax benefits, if the credit is used for the right purpose.

Tax Benefits with personal Loan

If used wisely, the interest paid on a personal loan can be tax-deductible. Some ways in which you can avail tax benefits for a personal loan are:

  1. Credit for business expansion: The entrepreneurship culture is escalating in India, and the most important factor which determines the growth of any business is capital. If you are using the credit of a personal loan for expenses that help in expanding your business, you can claim a tax deduction on the interest paid on the tax repayment.

While there are other loans also available for growing your business, a personal loan comes with no collateral or submission of the company’s finances. So, you can easily start or grow your business with a personal loan.

  1. Home renovation or improvement: Home like any other asset requires some changes from time to time. These days home renovation can cost you a fortune. Which is where a personal loan comes in. Under Section 24(b) of the Income Tax Act, 1961, if the personal loan amount is used for Home renovation or improvement purpose, the borrower can claim a tax rebate. The interest paid on the loan up to Rs 30,000 can be claimed as a deduction.
  2. Purchase of a house: If the personal loan amount is used for the purchase of a house, then too you can enjoy a deduction up to Rs 2 Lakhs on the interest paid.
  3. Purchase of assets: if the loan amount is used for the purchase of a new asset like non-residential property, gold, shares etc, you can enjoy tax exemption on the personal loan. The interest paid on such an amount is considered part of asset acquisition. This reduces your capital gains and also provides tax benefits.

Now you know that personal loans too come with a lot of tax benefits, based on how the amount is being used. The income tax act allows deduction on loans for only a specific purpose as mentioned above. The deduction is mainly available on the interest. This can be calculated by using a personal loan interest calculator will help you in determining the interest you will be paying, based on the loan amount, tenure and interest rate.

Conclusion

So, the tax implication of a personal loan completely depends on how the borrower uses the credit and plans on repaying the loan amount. You can make the most of the personal loan, by investing it in something that will help you grow, or use it for your luxury purchase, which will not help you save on taxes.

With so many benefits, you must choose the right lender for a personal loan. It will help you in enjoying various other benefits apart from tax deductions.

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