Due to the easy availability of finance from banks and Non-Banking Financial Companies [NBFCs], numerous individuals resort to external borrowing to meet their credit needs. There are various types of loans available in the market that cater to the diverse financial needs of individuals.
One such type of a loan is a personal loan. Such loans, also known as unsecured loans, may be used for numerous purposes such as medical emergency, domestic or international travel, home purchase or repair, higher education, purchase of a new vehicle, or for debt consolidation, among others. You may borrow an unsecured loan and receive the much-needed financial support during a cash crunch.
Besides the numerous benefits offered on personal loans, you may also enjoy tax benefits on the borrowed amount. However, an important aspect to note is that you may claim deductions on the repayment amount only if the loan amount is utilized for your housing requirements.
Stipulations of the Income Tax Act
According to Section 24(b) of the Income Tax Act, 1961, you may enjoy tax deduction on the loan amount used for the purchase of a residential property or for renovation towards the same. You may also claim tax benefit if you have utilized the borrowed amount to make a down payment towards the purchase of a home. Other valid expenses that may be used to claim tax deduction include repairs of your home, reconstruction, or for renovation.
A very important point to keep in mind is that you may claim tax deduction only on the interest paid on the loan, and not on the principal amount. This means that if you have borrowed a loan of Rs. 5.25 Lakh with an interest of Rs. 1 Lakh, then you may reduce your tax liability up to the interest amount, i.e. Rs. 1 Lakh.
Another point to consider is the limit of tax deduction allowed. In case, you have given the renovated house on rent, there is no limit on the amount that you may claim as a tax deduction. However, if the house is self-occupied, you may enjoy tax deduction of up to Rs. 1.5 Lakh.
You may also note that tax deduction on the interest amount cannot be claimed in case you have purchased the property at the construction stage. You may do so after the construction has been completed. Additionally, the house must be ready to be occupied within three years of borrowing the loan.
You may, therefore, utilize a personal loan for the purpose of purchase of a home, repairs, and renovation, and enjoy tax benefits of the interest component. In order to avoid any hassles, you may preserve all related documents that will help establish the end use of the loan. By doing so, you may reduce your tax liability largely.