Personal loans, tax benefitsPersonal loans are traditionally regarded as a borrowing of the ‘last resort’. This is largely true. The interest rates on personal loans exceed most other types such as housing loans or loans against shares. This is because personal loans are not backed by any specific assets. Their repayment depends entirely on how creditworthy you are. However, there is some silver lining to this scenario. Personal loan interest can get you two tax benefits.

  1. If you use the money for your business

The interest on the loan can be claimed as a business expense and thereby be used to reduce your income tax liability.

  1. If you use the loan for the construction/repair/renovation of your house

In this case as well, under Section 24B of the Income Tax Act, the interest on the personal loan is deductible from your taxable income up to amount of Rs 2 lakh. This limit now applies irrespective of whether the house is self-occupied or rented out.

Interest Rates on personal loans with major banks:

Bank Personal Loan Rates
State Bank of India 11.6% – 15.10%
HDFC Bank 14.75% – 20.7%
ICICI Bank 10.99% – 22%
Axis Bank 15.5% – 24%
Kotak Mahindra Bank 10.99% – 24%

These rates vary according to your credit score and background. You can find out how to improve your credit score here. In terms of background, if you have a steady, high-paying job in a well-established company they will be lower. If you are self-employed with irregular work, these will be higher.

Documents

The documents needed to obtain a personal loan are relatively fewer than for other types of loans. You have to provide the bank with proof of ID and address such as Aadhaar card, Passport and utility bills. In addition, you have to submit proof of income such as salary slips, employment certificates and income tax returns.

In the past few years, alternative sources of finance have emerged for these types of loans like peer-to-peer lending websites. We tell you about them here.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.