Claim Tax Benefits on Your Personal Loans: Here’s how

Personal loans are a popular financial tool for various needs like consolidating debt, funding major purchases, or handling unexpected expenses. Unlike specific loans tied to assets like homes or cars, personal loans are unsecured, meaning they don’t require collateral. They are accessible to many borrowers, though interest rates can vary based on the lender’s credit policy and other factors.

Common Misconception

It’s commonly believed that tax benefits can’t be claimed on personal loans, unlike home loans or business loans. However, borrowers can claim income tax benefits on personal loans availed for specific purposes.

Tax Benefit Scenarios

1. Residential Property Purchase or Construction: Under Section 80C of the Income Tax Act, you can claim a deduction from taxable income up to ₹1.5 lakhs in a financial year on the principal repaid on a personal loan for the purchase or construction of a residential house. Additionally, under Section 24, you can claim up to ₹2 lakhs in tax deductions on the interest paid if the loan is for a self-occupied house. For a let-out property, you can claim the entire interest amount as a deduction. However, the deduction on interest will be limited to ₹30,000 if the purchase or construction isn’t completed within five years from the end of the financial year in which the loan was taken.
2. Home Renovation or Repair: You can claim a tax deduction under Section 24 up to ₹30,000 per year on the interest paid on a personal loan for home renovation or repair. This is within the overall limit of ₹2 lakhs available on loan interest payment for self-occupied homes.
3. Business Investment: If you use a personal loan for business purposes, you can claim a tax deduction on the interest paid under Section 37(1). This applies even if the loan is for purchasing business assets like vehicles.
4. Education Expenses: If you use a personal loan to finance education for yourself, your spouse, or children, you can claim tax deductions on the interest paid under Section 80E. This deduction is available for a maximum of eight years or until you fully repay the loan, whichever comes first.

Non-Qualifying Purposes

Personal loans taken for non-qualifying purposes, such as weddings or holidays, don’t qualify for tax benefits. To claim tax benefits, you must submit valid documents supporting your claims during the Income Tax Return (ITR) filing.