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September 29, 2022 10:58 AM
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Tax deduction on loan interests is the interest paid after the loan is taken and before the principal amount is repaid. It is also known as deductible interest. The tax deduction of interest on personal loans can be claimed as a deduction from taxable income.

However, certain conditions have to be satisfied. These include:

  • The loan has to be taken to buy a house
  • The loan must be taken from a bank or other financial institutions
  • The interest rate on a loan should not exceed the rate of 20% per annum as per Section 10(1)(I) of the Act
  • The loan has to be secured with the property as security for the repayment of the loan
  • The interest has to be paid regularly without fail during the period in which it is taken along with repayment of the principal amount and any other installments due on account of the principal amount
  • If you have been taking personal loans for more than one year, then it is mandatory to take complete details about all amounts deducted from your salary and all deductions claimed

Tax deduction on personal loan

For a loan taken for personal use, the tax deduction on interest is allowed if the total interest paid on such loan does not exceed 10% of the taxpayer’s gross income. You can claim a maximum amount of $2,000 as a deduction. For a loan taken for any other purpose, the tax deduction on interest is allowed if the total interest paid on such loan does not exceed 50% of the taxpayer’s gross income. You can claim the maximum amount of $5,000 as a deduction. 

The interest paid by an individual is deductible under section 80C of the Income Tax Act, 1961. This deduction is based on the prescribed percentage (10% in the case of personal loans). The taxable income or adjusted gross income of an individual includes all their revenues. This excludes personal loans and other sources such as capital gains, which are exempt from tax under section 10(2) or section 12(2) (as applicable).

Therefore, one needs to understand how to get deductions on all other sources before calculating their tax liability. For example: if your taxable income exceeds $2,000, you will not get any deduction on interest paid on personal loans.

The total amount of tax deducted under section 80C can be higher than the actual tax liability as the deduction is allowed only on gross income. The excess of the tax deducted under section 80C over the basic tax liability can also be claimed as a refund by filing Form No. 88 – Return of Deduction for Tax Paid on Personal Loans with the Income Tax Department within three years from the end of the financial year this excess has been paid.

However, currently, with the new finance laws, there is no personal loan tax deduction. According to the experts at Lantern by SoFi, “The reason is that personal loans are typically used to cover personal expenses, such as paying for a home repair, expensive purchase, or consolidating debt, and you generally don’t get to deduct personal expenses.” The tax deduction of personal loan interest was abolished due to the increased interest rate on personal loans. Finance Act, 2017 introduced this provision.

 

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