Optimising Tax Advantages: Proper Documentation of Personal Loan Utilisation

Posted on Thursday, February 29th, 2024 | By IndusInd Bank

Personal loans are your saviour when you need a financial boost. They help you get instant funds to manage your cash needs without much hassle. The best part? No collateral is needed. Many turn to personal loans owing to their simple and quick nature. But there’s more to personal loans than just quick financial relief.

Beyond the obvious perks, personal loans also bring certain tax benefits. Most borrowers aren’t aware of this. They focus on the primary use of personal loans – to deal with urgent money requirements. Yet, with the right knowledge and documentation these loans can offer more. This lesser-known feature can be valuable in your financial strategy.

Know the Tax Benefits on Personal Loans

Personal loans may have tax deductions, but they apply in limited cases only. Whether or not the personal loan you take qualifies for tax deductions depends on the end use of the loan or how you use the loan money. Here are a few cases where you can claim personal loan tax benefits –

• Business investment: If you apply for a personal loan and use it for your business/profession, the interest paid on such loans is deductible. This falls under Section 37(1) of the Income Tax Act, 1961. This deduction applies even if the loan is for buying fixed assets like vehicles for the business.
• Purchase or construction of residential property: You can claim a deduction for the interest paid on the personal loan if it is used for the purchase, construction, or repairs of a residential property. These deductions go up to ₹2 lakh in a financial year under Section 24(b). However, only the property owner can claim this tax benefit on personal loans.
• Asset purchase: If you use the loan for buying assets like non-residential property, jewellery, stocks, or shares, there are tax benefits. The interest component of the loan can be added to the cost of the acquisition of the asset. This method effectively reduces the capital gains when you sell the asset.

Remember, tax deductions apply only to the interest paid, not the principal. Also, you can’t get tax benefits on personal loans if you take them for non-qualifying purposes like weddings, holidays, luxury purchases, recreational activities, etc.

Importance of Proper Documentation of Personal Loans

The Income tax benefit on personal loans can only be claimed through proper documentation. After all, documentation serves as evidence of how you utilise the loan funds. Here are some ways to maintain proper documentation:

• Open a separate bank account: If possible, use a different bank account for your loan-related transactions. This will help you easily track the flow of loan funds and, thus, simplify record-keeping.
• Save bills and receipts: Every time you spend part of your loan, save the receipt or bill. They are evidence for the usage of the loan’s funds. Be it for business expenses, asset purchases, or property construction, having all receipts in order will make your tax claim process smoother.
• Record how you use funds: Maintain each use of the loan amount in a ledger or digital format. This record should include dates, amounts, and purpose of each transaction. Such detailed entries ensure transparency in how you used the loan.
• Loan agreement and bank statements: Your loan agreement contains the loan’s terms and conditions. Along with this, save all bank statements showing loan disbursement and related expenses.
• Audit reports: If you use a personal loan for your business, get an audit report. This report, prepared by a CA, details the use of funds in your business. It helps you identify and rectify any financial management discrepancies.

Get an Instant Personal Loan from IndusInd Bank Digitally

Capitalising on the tax benefits of personal loans comes second – first, you need to secure the loan with ease. You can choose IndusInd Bank’s Instant Personal Loan and experience a truly digital approach to get access to credit. Features like instant approvals, quick fund disbursal, favourable repayment options, and a 100% paperless method help you focus on leveraging the tax benefits without getting bogged down by complex procedures.

Apply for an instant personal loan with IndusInd Bank today and manage your expenses, all the while optimising tax advantages.

Apply Now.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.