Usually when a personal loan is disbursed, the loan seeker is free to use the money for anything s/he wishes to. Unlike home loan repayment, personal loan borrowers are not given any income tax benefit.
However, this rule is subject to certain exceptions. One can claim income tax benefits on interest paid when the personal loan proceeds are used for any of the following purposes.
Income tax benefits given under these scenarios
I. For renovation of house or purchase: When you are using the loan money for renovating or purchasing the house, you are entitled to claim income tax exemption against the interest paid under section 24(b) of the income tax act.
II. For business expense: When you use the loan money on business expenses, you can then also claim income tax exemption for the interest paid.
Meanwhile, personal loan proceeds are not taxable since they are not considered income.
III. For buying assets: Additionally, if you use the loan to buy assets such as stocks, gold, or land you can add interest to the acquisition cost. This helps in reducing capital gains tax at the time of selling the asset.
Typically, a personal loan is taken only for such urgent purposes as renovation or construction of a house, particularly when the money raised through a home loan falls short.
For instance, if you have already exhausted your home loan limit and are falling short of ₹5 lakh as you renovate the house – you can rely on a personal loan instead of delaying the plan of getting the house constructed.
Likewise, if you fall short of money in your business operations and have already exhausted your overdraft limit given on the current account – the only option that you will be left would be to raise a personal loan
(Note: Raising a loan comes with its own risks. So, due caution is advised)
