A personal loan is the fastest way to finance certain milestones in life, such as getting married, purchasing a car, going for overseas education, and more. You can also use this finance option to tackle a medical emergency, as many have done in the coronavirus-ravaged year.
Personal or unsecured loans are lent without the borrower pledging security or collateral. At the same time, the amount borrowed is not a part of your income and therefore, it is not taxable, as you return the amount with additional interest. Thus, according to the Income Tax Act, there are no tax exemptions available for these loans.
However, you may avail of tax benefits on personal loan depending on the end-use of the loaned amount. In such a case, you can apply for tax deductions on the interest paid if you have used the money to finance any of the options mentioned below.
Loan for purchase of assets
One way to avail of personal loan tax benefits is by investing the loan amount in the purchase of assets like gold, silver, property, stocks, etc. The amount of interest paid cannot be claimed within the same year, but it is added to the cost of acquisition of assets. You can reclaim this when you sell the assets.
Investment in construction of a residential property
Suppose you use the proceeds from a personal finance to invest in purchasing, constructing or renovating a residential property such as a house. In that case, the personal loan interest rate paid on the loaned amount can be deducted from the Net Value of the property. This provision is made under Section 24 of the Income Tax Act, and you can avail of a tax exemption up to Rs. 2 lakhs.
To avail of the benefits, you must submit documents certifying that the loaned amount was used towards the purchase, construction or renovation of the property.
How to apply for personal finance?
The personal finance application process is quick and convenient to meet your urgent cash requirements. To apply, first prepare the necessary documents like proof of residence, proof of identity such as Aadhar Card, proof of income and proof of employment. Further, depending on whether you are self-employed or salaried, you may also need to present your bank statements.
To sum up
Since the personal finance amount is not added to your income, you cannot avail of tax exemptions if the amount is used for any purpose other than those mentioned above. However, that should not deter you from taking an unsecured loan as this can be repaid easily in a flexible tenure and there is no stipulated use-case of the amount to restrict its usage.
Applying for an unsecured loan is a quick process, thanks to the digitisation of the procedure. To apply for a personal loan, make sure to calculate your personal loan eligibility using a calculator given on your chosen lender’s website. This will also help you stay prepared and improve your eligibility.