Personal loans help you overcome difficult financial situations which you encounter in your life. Finding yourself in financial straits related to education course fees, hosting a wedding reception or buying a new car is a situation no longer to be bothered by. Availing a personal loan will help you solve all such economic riddles.
Why Personal Loan?
Being a form of unsecured loan, a personal loan usually requires no collateral asset to be issued. This relaxation is compensated with a higher interest rate than to be found in a secured loan. But more than not, this does not pose as an obstacle, for personal loans are much easier to be availed than any other types of loans. Whether you are a salaried professional or a self-employed individual, getting a personal loan online or offline is relatively simpler and more convenient.
You can also choose the tenure for the repayment of the personal loan which generally ranges from 1 year to 5 years. Also, for many people, when paying an outstanding or debt amount of their credit cards becomes difficult, they cover the same with the help of a personal loan. Doing this allows them not only extended payment tenure but the rate of interest is also lesser than that they have to pay for the credit cards. In addition to this, converting a credit card into a personal loan prevents the credit score from taking a radical fall due to credit payment defaulting. All these have been the benefits of availing a personal loan. However, there are other things as well that one should know about personal loans and such is taxation involved in it.
Taxation on a Personal Loan
Personal loans are not considered as a form of income, therefore, they are not considered taxable. But this is not the universal principle. There are instances where a personal loan can be considered as an income and hence taxation levied on it according to the Income Tax Act.
If the Loan is Forgiven
If a scenario arises where the lender comes to a decision of reprieving your debt then the situation might overturn. What this implies is that if the lender forgives your borrowed amount or part of it then, apparently, the part of the loan forgiven would be considered as your income. The formal term for this income is Cancellation Of Debt (COD). Since the loan has been converted, it would become a taxable income.
This also comes with certain exceptions. For instance, if the personal loan is forgiven as a form of a gift, then the amount will not be taxable.
Borrowing from Unknown Sources
Borrowing from valid and legitimate institutions such as banks is not only a safer option but it also provides taxation relief. If the source from which you borrowed is unknown or not officially recognized by Credit Information Bureau India Limited (CIBIL), then the taxation authority might treat it as your personal income and hence taxes will be applied on it.
Tax Benefits on a Personal Loan
Irrespective of the fact that whether a personal loan is tax-deductible or not, one can still enjoy tax benefits on a personal loan. The Government of India grants tax benefits on personal loans if they are taken for purposes such as business-related investments, for buying a new asset or related to education. As long as the loan availed is considered tax-deductible, tax benefits will follow.
The cases where the user can access tax benefits from the personal loan are as follows:
If the borrower has taken a personal loan to be used for a business purpose, he can expect some form of tax benefits for his personal loan. This is because the interest paid on the personal loan by the borrower can be claimed as an expense which reduces his net profit. This state of affairs is going to go to the borrower’s favour. There would be a concession on the tax that he would have to pay. This concession amount is generally not specific and can be as minimum or maximum as imaginable. However, it is assured that there would be something.
Investments on Assets
Tax benefits are also granted to the borrowers who have taken a personal loan for the purchase of non-residential property or assets such as shares, jewellery, etc. The catch, however, is that a borrower will not be in the position to claim tax deductions in the very year he took the loan and paid the interest. Once he opts for selling the asset he has acquired then only the tax benefits will follow him.
Purchase of Residential Property
Another case where the personal loan can provide tax benefit is when it is taken for the purchase or construction of a residential property. The tax benefit can be had in the form of interest paid for the personal loan. If the house is bought for the personal use of the owner/borrower, the maximum amount that can be deducted as tax is Rs. 2,00,000. However, there is no cap on the amount to be deducted if the house is rented to someone else. Though it is to be noted that the tax amount deducted is from the interest charged and not from the principal part of the personal loan amount.
Some Tips for Getting Personal Loans at Better Rates
Getting a personal loan is quite simple and easy. The documents required are minimal and the payment tenure is also flexible. Regardless of that, there are certain things to be kept in consideration if the borrower is keen on getting a personal loan on even better terms and conditions.
- Keeping a good credit history is an essential part of availing a personal loan. If the borrower’s credit history is good, he will be preferred by the lenders. On top of that, owing to his well-maintained credit history, he may also enjoy other benefits such as better interest rates and other reward facilities.
- To add to the previous point, keeping multiple credit cards often reflects poorly on credit history. Therefore, the borrower would do well to maintain as few credit cards as possible. Generally, a potential credit card, like a Standard Chartered credit card, will serve the purpose of all the cards.
- Settling the account with previous loans, if any, will increase the borrower’s chances of getting a personal loan.
- Making timely payments on loans will help the borrower in maintaining a good credit report which will help him in the future to avail further loans at a better rate.
A personal loan becomes twice as effective if the tax benefits are added to it. Also, it is by no means limited to taxation benefits, if you happen to use a personal loan for purposes aforementioned. It is highly recommended to seize on the benefits the loan offers when it comes under the umbrella of taxes.