Is Personal Loan Amount Taxable
Is Personal Loan amount taxable? Or, can you actually get Income Tax benefits on interest on Personal Loan?
Taxes and the Personal Loan: Is Personal Loan Amount Taxable?
A Personal Loan can help you tide over a difficult period, pay for unexpected expenses, or get funds for investment. These are unsecured loans which may come at a high rate of interest as they can be used for any purpose.
If you have a good credit score, they are quickly sanctioned as well.
Is Personal Loan Amount Taxable?
Only funds that are considered as income are taxable under the IT Act. If you have taken a Personal Loan from a recognized source like a bank or NBFC, it is not considered as income. So, Personal Loans are not taxable.
If you have borrowed from informal sources, the funds can be considered income. You may be taxed. ‘Informal sources’ include your family and friends.
Eligibility for Loan:
Loan eligibility criteria might vary depending whether you are salaried or self-employed. The conditions may also vary from one lender to another. Generally, any individual between 21 and 60 earning a regular income qualifies for a Personal Loan.
Each bank sets it own criteria for the monthly income minimum requirement, and age requirements. Some lenders provide loans only to salaried individuals. Others provide loans to self-employed individuals as well.
The main documents required for a Personal Loan are the KYC (Know Your Customer) documents. Lenders usually ask for these, and a passport size colour photograph. KYC documents include ID Proof, Address Proof, Age Proof, and Income Proof. The first three are similar for both salaried and self-employed individuals.
Income Proof Differs:
For the Salaried
a.) Previous 3 months salary slip
b.) Form 16
c.) Last six months bank statement (for the account into which your salary is paid)
d.) Investment proof (if any)
Job continuity Proof
Any one of the following documents
a.) Appointment letter for current job
b.) Current job Employment Certificate
For Self Employed
a.) Income Tax Returns for the last 2 years
b.) Last 2 years Balance Sheet
c.) Last 2 years Profit & Loss Statement
d.) Bank statement for the last 1 year
e.) Investment proof (if any)
Business Existence Proof
a.) Saral Copy for last 3 years
b.) Certificate of registration under Shop & Establishment Act
c.) Company Registration License
d.) Tax Registration copy
How To Apply:
You can now apply for Personal Loan online. Compare loan offers from various banks and NBFCs, find the Personal Loan offer that suits you. Go to the website of the lender, navigate to the Personal Loan section, and apply for loan.
You have to fill in the required details, and then submit the documents necessary. Some lenders offer to collect these documents from your home. The loan is quickly processed. Once the lender approves, they credit the amount to your bank account within a few days.
Income Tax Benefits on Interest on Personal Loan
Personal Loan obtained through the proper channels is not taxable. Depending on the end use, you can even get tax exemptions on the loan. Here is how:
If You Have Used the Loan for Your Business
If you have used the loan as investment in your business, keep a formal proof of this on hand while filing IT returns. You can claim the amount as business expenses, which will reduce your taxable profit. Thus, your tax liability is reduced.
If You Have Used It for House Purchase
Under Section 24(b) of the IT Act, you can claim tax deduction on the interest component of EMI payments when a loan is used to buy a house. If the house is self-occupied, you can claim tax exemption on the interest paid up to Rs. 2 lakhs. If the house is let out on rent, there is no cap on the total interest amount that can be claimed for tax deduction.
This exemption is also applicable for loan amounts used for home repair, renovation, reconstruction. Preserve records of amount paid towards labour, materials bought etc.
A Personal Loan can come in handy when you need quick cash for large expenses. If you don’t have assets to provide as collateral, this unsecured loan is for you. Get these loans only when you need them, and pay them off quickly.
Do not get too many Personal Loans. They may become difficult to handle, and can bring down your credit score.