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There’s one word that can make anyone run away or fall asleep – taxes.
And that’s unfortunate really, considering how it can affect the state of your finances. Done right, you can end up saving tens of thousands more than the average Joe. For that, however, you need to be knowledgeable.
That’s what Vidya thought so too, even though she had two loans to pay off – a wedding and another home renovation loan. Between her upcoming wedding, the renovations at home and the projects she had to finish at work, she barely had any time to consider the tax implications. And come March, she paid her normal amount of tax, without taking into account the impact of the loans.
To make sure the same thing doesn’t happen to you, here’s a handy cheat-sheet you can refer to for taxes related to personal loans:
Not counted as income
It is common knowledge that we pay taxes on what we earn. A part of our income is set aside to pay some taxes. When you take a personal loan, it is not considered an income. This means that your personal loan is not taxed.
Avail tax benefits
In fact, forget about paying more, you can actually lower your tax burden. You can claim tax benefits on some personal loans. The exact quantum of tax benefit depends on the kind of personal loan and its use.
Here’s how you can save money
1) Home renovation loan
The government favours the money you spend towards your home. It offers tax benefits on loans used to purchase land and property. It also allows you to avail deduction from taxable income through loans used to construct or renovate your house. Home loans can help you lower your taxable income by as much as Rs 3.5 lakh. Of this amount, Rs 1.5 lakh is the limit under Section 80C of the Income Tax Act. This takes into account the principle loan amount you pay off. The remaining Rs 2 lakh can be availed through the interest you pay on the loan as under Section 24 of the Act.
However, these rules differ if you opt for a home renovation loan, i.e., you use the money to fund repairs and reconstructions. In this case, you can only avail a tax deduction on the money you pay off as interest. This deduction is limited to Rs 30,000.
Remember, though, you can always reduce your taxable income through the expense route too. It’s simple — just declare the expenses for the maintenance of your property. You can get a 30% deduction on this.
2) Education loans
To improve literacy rates and make education accessible, the government allows you to get tax benefits on your educational loans. Whatever you pay every year as ‘interest’ can be deducted from your taxable income. This then helps reduce the amount of tax you pay. You can avail this tax benefit on education loans taken for yourself, your child or even your spouse!
3) Self-employed individuals
Vidya was an independent professional — not a salaried individual. This meant she could avail additional benefits on her car and personal loans. She could declare the car-related expenses as part of her ‘work expenses’. Plus, she could use the interest payment on car loan for tax deduction too. All this helps reduce taxable income.
Had she been a business owner, and bought the car for her business, she could have claimed benefits on the loan interest payment as well as the fall in the value of the car!
Any other personal loan can also help avail tax benefits for business owners and self-employed individuals.
The bottom line
Tax matters are important. With a little care and prudence, many people like Vidya can save a lot of money on tax payments. This, in essence, helps pay off loans without any problems and also maintains sanity.
So have you started your tax planning yet?