Tax Benefits on Personal Loan in India: Sections, Rules & Eligibility

Personal loans are widely used to meet immediate financial needs such as medical expenses, weddings, or short-term cash gaps. Beyond quick access to funds, personal loans can also offer tax benefits when used for specific purposes allowed under the Income Tax Act. These benefits can help reduce your overall tax liability while managing financial obligations more efficiently. Since many borrowers are unaware of the tax benefits on personal loans, this guide explains the applicable sections, rules, and eligibility criteria to help you understand how to claim them correctly.

Tax Benefits on Personal Loans

Tax benefits on personal loan structures can help borrowers reduce their taxable income when used strategically. While personal loans are primarily known for meeting immediate financial needs like medical emergencies or weddings, they also offer significant tax-saving opportunities under specific conditions defined by the Income Tax Act, 1961. Understanding the personal loan tax benefits available is essential for taxpayers looking to maximize their savings while managing debt.

Are Personal Loans Eligible for Tax Exemption?

A common point of confusion for many borrowers is whether a personal loan itself is considered taxable income. By law, the principal amount of a personal loan is not considered income and is therefore tax-exempt as it is a liability, not an earnings source. However, personal loan tax exemption on interest payments is only available when the loan is utilized for specific purposes mandated by the Income Tax Department. Purely consumption-based loans, such as those used for vacations or gadgets, do not qualify for any tax relief.

Understanding Personal Loan Tax Benefits

To maximize your personal loan tax benefits, you must understand the specific sections of the Income Tax Act that govern these deductions:

• Section 24(b) - Residential Property: If you utilize a personal loan for renovation of a house or construction purchase, the interest paid is deductible. For self-occupied properties, this deduction is capped at ₹2 Lakh per financial year under the Old Tax Regime. 

Note: For repairs or reconstruction, the limit is restricted to ₹30,000.

• Section 37(1) - Business Purposes: When a personal loan is used for business expansion or working capital, the interest paid can be claimed as a business expense. This provides a tax benefit on personal loan in India by reducing the net taxable profit of the enterprise.
• Section 80E - Higher Education: If a personal loan is used for higher education for oneself, a spouse, or children, the interest paid is deductible under Section 80E. Unlike home loans, there is no upper limit on the deduction amount for a period of up to 8 years or until the interest is fully paid, whichever is earlier.

Tax Benefits on Personal Loan for Education and Business Purposes

The versatility of personal loans allows them to act as financial bridges, each carrying unique tax advantages:

• For Education: Under Section 80E, a significant personal loan tax exemption is available for borrowers who use the funds for "Higher Studies" (encompassing all fields of study after senior secondary).
• For Business: By categorizing the interest as a business expenditure under Section 37(1), entrepreneurs can lower their tax liability. This is particularly useful for MSMEs obtaining funds from regulated NBFCs.

Eligibility Criteria for Availing Personal Loan Tax Exemption

To successfully claim a tax benefit on personal loan, borrowers must meet several critical requirements:

• End-Use Verification: You must provide clear evidence (invoices, receipts, or construction certificates) that the loan was used for the declared tax-saving purpose.
• Primary vs. Joint Borrowers: Only the person legally responsible for repaying the loan can claim the deduction. In joint borrowing, both parties can claim benefits in proportion to their repayment, provided they share the asset's ownership.
• Regime Selection: As per the Finance Act 2025, the New Tax Regime is the default. However, most personal loan tax benefits (like Section 24b for self-occupied property) are only available under the Old Tax Regime.

Conditions and Documentation for Claiming Tax Benefit on Personal Loan

Proper documentation is the backbone of any tax claim. To ensure your personal loan tax exemption is valid during an assessment, maintain the following:

• Interest Certificate: A document from your lender (e.g., Hero FinCorp, a regulated NBFC) that bifurcates the EMI into principal and interest components.
• Key Fact Statement (KFS): Mandated by RBI (April 2024 Guidelines, effective 2025), this document provides transparent details on the Annual Percentage Rate (APR) and all charges associated with the loan.
• End-Use Proofs: Receipts from contractors or educational institutions must be retained for at least 8 years to satisfy Income Tax scrutiny.

Impact of Tax Regimes (Old vs New) on Personal Loan Tax Benefits in India

The choice of tax regime in 2025 drastically alters your savings:

• Old Tax Regime: Offers high deductions (Sec 24b, 80C, 80E). It is usually better for those with high interest outflows.
• New Tax Regime (Section 115BAC): Offers lower slabs but removes Section 24(b) deductions for self-occupied property. However, interest for let-out property and business expenses (Sec 37) may still be eligible.

How to Calculate Tax Benefits on Personal Loans?

1. Obtain Interest Certificate: Find the total interest paid in the FY.
2. Verify Limit: For home repairs, the limit is ₹30,000; for construction/purchase, it is ₹2 Lakh (Sec 24b).
3. Subtract from Income: Deduct this amount from your 'Income from House Property' or 'Gross Total Income' depending on the section used.

Common Myths About Personal Loan Tax Benefits Debunked

• Myth 1: Does personal loan have tax exemption on principal? Fact: No. Only the interest portion is eligible for deduction under specific sections.
• Myth 2: All personal loans are tax-deductible. Fact: Only those with verified end-use for home, business, or education qualify.

FAQ on Personal Loan Tax Benefits

Does Personal Loan Interest Qualify For Tax Deduction In India?

Yes, if used for home improvement, education, or business (Sections 24b, 80E, or 37).

Can I Claim Tax Deduction On Personal Loans For Home Renovation?

Yes, up to ₹30,000 for repairs/renovation under Section 24(b) in the Old Tax Regime.

Are There Tax Benefits For Business-Use Personal Loans?

Yes, interest can be deducted as a business expense under Section 37(1).

What Documents Are Needed?

Interest certificate, Key Fact Statement (KFS), and end-use receipts.

Do Unsecured Personal Loans Have Tax Benefits?

Yes, the tax law looks at usage, not whether the loan is secured or unsecured.

Disclaimer: The information provided is for educational purposes only and reflects tax laws as of the Assessment Year 2025-26. Hero FinCorp is a regulated NBFC (Non-Banking Financial Company). We do not provide tax advice. As tax laws (especially Section 115BAC) are subject to change, borrowers are strictly advised to consult a Chartered Accountant or qualified Tax Advisor before making financial decisions. Loan approval is subject to credit assessment and RBI's Fair Practices Code.