A personal loan is an unsecured loan which helps meet financial needs. There is no need to furnish a surety or collateral at the time of availing a personal loan. What makes personal loans popular is that there are no restrictions on the purpose of utilization of funds. You can use the funds received as personal loans for any needs.
When you avail a loan, the foremost consideration would be to check if it offers tax benefits. Tax benefits on loans help mitigate the financial burden of loan repayment which involves interest, by saving on income tax. For home loans and education loans, tax benefits are mentioned upfront and are well advertised over personal loans. However, the catch is funds received for home loans and education loans can be used only on a specific purpose like home financing and higher education respectively. These loans are not availed often. You may avail home loan or education loan only once or twice in a lifetime.
If this is the case, then what does an individual do when he or she needs money for other purposes? A personal loan would tick the boxes. Personal loans are simple to manage for a first time borrower, easy to secure and absolutely collateral free. However, there is no lender who advertises or talks on the tax benefits offered on personal loans. This is because; personal loans are unlike other loans where the list and criteria of tax benefits are straight forward. With personal loans, tax benefits are shaped on how you use the loan.
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SEE ALSO: What Is Personal Loan?
Following are the ways in which you can claim tax benefits on personal loans:
If you utilize instant personal loan to finance business expenses like purchasing equipment, enhancing your working capital and expanding business operations, then you are eligible for tax benefits on personal loans. This is because the amount paid toward loan repayment can be stated as a business expense and reduces your quantum of taxable profit and tax liability at the same time.
Section 24 of the Income Tax Act states that if you use personal loan to buy, construct or renovate a housing property, then you can claim the interest repayments of the loan for tax deductions. However, there is catch in this, as the upper limit for tax deduction stands at Rs 2 Lakhs a year in case the house is self occupied. If the house is let out, then there is no upper limit on the deduction.
If you want to save on paying taxes, and don’t have a house to repair or a business to invest, then you must consider this option. If you utilize the loan on purchasing a valuable asset like stocks of a company or something else, then you can consider the interest paid to be a part of the cost involved in acquisition. Note that you won’t get the tax benefits for the year you have availed the loan. You get it in the following year, if you sell the valuable asset. When viewed as a part of the cost of acquisition, the interest paid on personal loan reduces the capital gains earned out of the sale of the asset and so reduces the taxable sum too.
When you avail a personal loan the next time, note the excellent tax benefits offered if used smartly and this can go a long way in lowering the financing cost. However, while you can get tax benefits on personal loans when utilizing the loan for the following three reasons, it is critical to note that only the amount paid towards interest repayment allows you claim tax benefits and principal repayment gives no such benefits. Therefore, it is worth the time and effort put in research to ensure borrowing experience is cost effective.
Following are the three main benefits that you must look for in a personal loan:
1) High Loan Quantum: Expanding your business, renovating home, purchasing an asset whose worth increases over time and so on, are high cost undertakings. You must select a loan that offers sufficient funds as per your requirements.
2)Flexibility in Tenure: Flexible tenure gives you the freedom of managing loan repayments as per your financial capability. In fact, many lenders offer personal loans that come with an option of repaying just the interest each month and principal as a lump sum sometime later.
3) Faster Processing: Personal loans are a great option for financial emergencies. But, a lengthy procedure might come in the way. Choose the lender who sets simple eligibility criteria, minimum documentation and quick online application and approval processes. There are so many lenders that offer instant personal loans on producing the requisite documents. You must explore different lenders and compare them before making a choice.
Well, no documented loan comes without any interest. Interest can be considered the cost of borrowing. Currently, popular personal loan lenders are charging an annual interest rate of 10-15% a year.
Most lenders charge a fee called ‘processing fee’ for processing the loan application filed by potential borrowers. The fee collected towards processing fee is utilized on administrative expenses while processing a loan application. This includes verifying if the applicant is meeting the eligibility criteria, checking credit history and so on.
The table below shows the rate of interest and processing fee levied on borrowers by the popular personal loan lenders in India:
SEE ALSO: Processing Fee On Personal Loans
As personal loans are unsecured, the documentation involved is not complex. You must produce a valid identity proof, address proof along with PAN card, income proof documents like latest income tax returns (ITR), Form 16, latest three months payslips and latest six months statement of the salary account.
Following documents are generally accepted as valid identity proof:
Following documents are generally accepted as valid address proof:
Apart from the documents, lenders may accept other documents; you must ask the lender for the list of acceptable documents.
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