Personal loan is undoubtedly the favored loan product to go for when one does not have any collateral available with him to extend to the lender. Being an unsecured cash loan, the proceeds can be utilized for any purpose right from funding a function to medical expenses. And this flexibility makes the loan highly sought after irrespective of fact that the personal loan interest rate is quite high than other loan products.
The common understanding about this loan is that it does not entitle one to tax rebates akin to the home loan. But is that a factual perception or is there a way to gain advantage even on this loan and save taxes? Read on to know more about it.
Is that a possibility?
Yes there is a possibility of deriving tax benefits through the personal loan. The loan proceeds in case are being utilized to bridge the gap, or to say to fund the margin money for down payment of the purchase of a house, then the personal loan can come handy to save taxes. This is true to a regular personal loan or even in case of a loan for low CIBIL score.
Under what section is the tax rebate available?
Under section 24 (B) of the income tax act any individual who has borrowed money to fund the house purchase is entitled to tax benefit. The act does not specify the loan product. So even if one has taken an unsecured loan to fund the capital requirement for purchasing the house, the tax benefit can be availed.
How much tax rebate can be availed?
While the home loan entitles one to rebate under section 80 (C) as well apart from 24 (B), the tax saving on personal loan repayment would be restricted to the interest component only. The limit to avail tax saving under this section stands at Rs 150,000. In case of joint property ownership, the same would get shared between the owners. Just to mention, under section 80 (C) the benefits can be availed up to the prescribed limit as per the act.
What all gets covered?
The tax benefits can be availed not only for funding the purchase of the property but for home improvement as well. So if one decides to renovate or undertake extension of the home and avails a personal loan to fund the cost on this front, the interest paid on the loan will entitle him to take advantage of the tax break. This is a big benefit since one can decide to go in for renovation even after few years of purchasing the house and the tax benefits can be availed even after the home loan has been repaid in full if one has been taken.
What documentation would be required?
In a situation where one decides to avail tax benefit under section 24 (B) of income tax act, one would be required to maintain certain documentation. Unlike a home loan where the repayment schedule is deemed to extend the tax sops, one would require to keep the trail on the amount from personal loan being paid to developer or earlier owner. Also, if the loan is being used towards renovation or extension, the bills and payment trails are also to be kept on record to use it for tax benefit.
So now that you have got to understand the fact that even a personal loan can entitle you to saving taxes, go ahead and utilize it.
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