There have been instances where we have felt as if we could borrow some amount of money. But we didn’t want to go through the embarrassment of asking someone even if it is your family or friends. During such situations, one wishes to have a way out. Fortunately, banks have the feature of a Personal Loan.
A personal loan is when you borrow some money from your bank and use it for a variety of purposes. You can use this loan to pay off any consolidated debts, pay for home renovations, plan a wedding or invest it somewhere. These personal loans can be borrowed for some time and are repaid with interest levied on them. Some banks may also charge you some extra fees for personal loans.
There are a few benefits of getting a personal loan. These loans take very less time to get approved. On top of it, personal loans require minimal documentation and also improve your credit score. In addition to that, you also avail of tax benefit on personal loan which helps you with adequate savings. Let’s understand a bit more about personal loans.
Types of Personal Loans:
Personal loans are of two types, secured or unsecured.
A secured personal loan is attained by providing some kind of collateral as a condition for borrowing the amount. For example, you may provide proof of some cash assets to secure the loan, or a physical asset like property, car, etc. This means that if you are unable to pay the debt then the lender can confiscate the asses provided for security.
On the other hand, an unsecured loan does not require any collateral to borrow this loan. Usually NBFCs, banks, online lenders, credit unions and qualified borrowers. This kind of personal loan is usually very risky because there is no collateral as security. Unsecured personal loans have a higher interest rate than the regular.
Applying for a Personal Loan
The applicant needs to be 21 years old and have to have all the necessary documents in place. The loan applicant cannot be of older than 65 years of age during the loan closure.
Before you apply for a personal loan you should go through the interest rates of various banks. It is better to make an informed decision than to just turn a blind eye to it.
The rest of the process is pretty easy. You fill out the particular bank’s application form and based on the information banks will decide if they approve or not. The lender might direct deposit these payments into your bank account or you may receive a check
Tax benefits on Personal Loan
Well, if we go through the Income Tax Act there are no particular mentions of a personal loan tax benefit. You can easily avail of tax benefits on other loans such as education loans, home loans, etc. This does not mean that you cannot avail of tax benefits on personal loans. So basically there are no specific mentions about how to avail of tax benefits you can show that the loan will be used for something that would be allowed by the Income Tax Act.
Below are the three ways to avail a personal loan tax benefit easily:
Invest or expand your business
If an individual borrows a personal loan to invest in some business or expand his or her business. The interest can be laid off as an expense. This will help reduce the tax liability and will also reduce the total taxable profits that are already invested in the business. There is no limit to the amount that may be claimed.
Investing in a residential property or construction of a property.
Anyone can avail of the tax benefits of a personal loan if they can produce proof that they have bought a property with the loan amount. An individual can avail of this benefit for repayment of interest amount under Section 24 of the Income Tax Act, 1961. The maximum amount that can be reduced from your tax is Rs 2,00,000. The loan applicant doesn’t need to worry about the limit on the amount that can be claimed in the name of the purchased property or house. The borrower must be the owner of the property to avail of tax benefits.
Investment in other assets
This is the third way to take advantage of the tax benefit on personal loans. An individual can expect tax deductions on their loan if they use the loan money to invest in other assets like jewellery, commercial properties, shares, stock market, etc. You can reduce the capital gains by using the loan money to acquire individual assets.
If you are considering applying for a personal loan you should properly go through all the terms and conditions. Do confirm with your banker about the tax benefits you can get out of your loan and try to get a lower interest rate on the loan. Taking a personal loan and paying it off within the given time will also help with your credit score.
