Personal loans are a widely used financial tool in India, offering quick access to funds for a range of purposes—be it education, healthcare, home construction, or even to repay other outstanding loans.
However, how these funds are treated under the Income Tax Act has always raised questions among borrowers. Many wonder whether personal loans are taxable and, if so, under what circumstances.
This write-up is dedicated to explaining this concept in detail. In brief: as per the Income Tax Act of 1961, personal loans are considered liabilities—borrowed funds that require repayment by the borrower. They are not classified as income and are, therefore, not subject to taxation.
Personal loans: Not taxable income under income tax
According to income tax laws, only income is taxable. Since personal loans are not earned but borrowed, they do not form part of your taxable income. Consequently, they are not subject to income tax. This exemption applies regardless of the purpose of the loan—whether it’s for business, personal expenses, education, or any other use.
This is a crucial point to keep in mind when applying for personal loans or filing your tax returns.
What are the current interest rates applicable on personal loans?
As of April 2025, personal loan interest rates in India range between 10.25 per cent and 24 per cent per annum. The actual rate offered to an individual borrower depends on multiple factors such as credit score, income level, loan amount, tenure, and repayment capacity.
Leading financial institutions like SBI, HDFC Bank, and ICICI Bank offer competitive interest rates to both salaried and self-employed individuals. For specific loan-related queries or applications, it’s best to contact the customer service team of your respective lender.
Note: The interest rates discussed in this write-up are illustrative only. For the most updated terms and conditions, consider reaching out to your respective financial institution.
What are the tax benefits on personal loans?
While the principal amount of a personal loan is not taxable, borrowers can claim tax deductions on interest payments—provided the loan is used for specific purposes.
- Home Renovation or Construction: Under Section 24(b) of the Income Tax Act, interest paid on a personal loan used for home improvement or construction can be claimed as a deduction—up to ₹2 lakh annually for self-occupied properties.
- Business Investment: If the loan is used for business-related expenses, the interest paid can be claimed as a deduction under Section 37(1) of the Act.
- Education Expenses: Personal loans used for higher education may qualify for tax deductions on interest paid under Section 80E.
Note: The provisions discussed above are for illustrative purposes only. For the most recent updates, processing charges, changes in tax ramifications and benefits consider reaching out to a certified tax consultant.
Documentation, exceptions and other requirements
Eligibility for tax benefits on personal loans is contingent on proper documentation—clearly outlining how the borrowed funds are used. For instance, if the loan is spent on weddings, vacations, or leisure activities, no tax deductions can be claimed.
Maintaining proper invoices and receipts is crucial if you intend to claim deductions while filing your Income Tax Return (ITR).
Note: For complete details with regard to the available tax deductions, consider reaching out to your loan-providing financial institution.
Conclusion
In summary, personal loans are not considered taxable income in India. However, their usage can determine whether borrowers qualify for tax benefits. Proper planning, documentation, and prudent use of funds—such as for education, business, or medical expenses—can make personal loans a financially smart option.
Borrowers should aim for compliance and responsible utilisation of these funds to ensure they reap maximum financial and tax benefits over the loan tenure.
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