If you have taken a personal loan for buying a car or house, you are surely entitled to tax benefits. In addition, if you have taken a personal loan for higher education or self-employment purposes, then your interest payment on this loan can also be claimed as a deduction from your income tax.
When you take a personal loan for house construction
You can claim a personal loan tax deduction if you take a personal loan to fund your house construction or renovation. The tax benefits are typically available only when the house is being constructed or renovated for your own use.
Take note that this type of loan will not be eligible for a tax deduction if used toward purchasing other properties such as land and commercial properties.
In order to claim it, you have to follow these steps:
- You need to obtain an ITR-V form from the bank or financial institution from which you borrowed money. (Form 16).
- You should then fill out Schedule M claiming your personal loan interest income and expenses (Schedule M-1):
- If you received interest income in cash, fill out Part 1 of the schedule with information on how much interest was paid by the lender during the year and how much principal was repaid by yourself at various intervals throughout that period; then calculate what amount is left as unpaid interest due at each interval which will appear in Part 2a of Schedule M-1.
- If instead all payments were made by way of cheque/demand draft etc., enter them into Parts 1b & 2b respectively instead of those marked “Cash” boxes on Part 1a & 2a! This step may seem redundant but think about it — why do banks issue those little slips with each cheque saying “PAYMENT BY CHEQUE”? Because they’re legally obliged by law!
When you take a personal loan to buy vehicle under Rs.10 lakhs
If you take a personal loan to buy a vehicle under Rs.10 lakhs, then the benefit of tax deduction will be available on the interest payment made on it. If you are in need of money and willing to borrow from a bank or NBFC, then it is better for you if your monthly installments are not more than Rs.25000/- per month as there will be no TDS deduction in this case.
Also, if your salary is less than 2 lakhs per annum and has availed home loans then those amounts get deducted from taxable income without any TDS deduction on interest paid by an individual on the home loan taken by them.
When you take a personal loan for higher education
If you are a student or a first-time job seeker, the interest paid on your personal loan can be deducted from your taxable income. To qualify for this tax benefit, the loan must be taken from a bank or non-banking financial corporation (NBFC). It should also be used to pay for tuition fees and other expenses related to higher education.
As the financial advisor’s Lantern by SoFi states, “There are some situations, however, where you may be able to deduct the interest you pay on a personal loan. This includes when you use the loan proceeds to pay for qualifying business or education expenses or when the funds are invested in taxable vehicles.”
Remember, if you are taking a personal loan to avail any of these tax benefits, then you must keep all the requisite documents in order. This will help you avoid any hassles with income tax authorities.
