What are the Tax benefits on Business Loan in India?

The key purpose of business loans is to help start a new venture or expand the current operations of an existing company. It can be taken against a property or equipment. Or it may be unsecured – taken without offering a security or collateral.

When you take a business loan, it comes with interest charges, which is essentially an expense that the borrower pays for borrowing the money. When it comes to the tax benefits of business loans in India, the interest you pay is tax exempt and can be shown as a business expense. However, you get no tax benefits on the principal loan amount. So, in a nutshell, you get a tax benefit on the interest amount.

Here’s the explanation in more detail.

Interest repayments are on business loan are tax-deductible 

The interest component on a business loan is tax-deductible i.e., you can subtract this amount from the business’ net income during income tax calculation. It is important to update your business loan records so you have a proof if tax authorities ask for them. 

Principal on business loan is not tax-deductible 

The principal amount borrowed is not tax-deductible i.e., you cannot deduct this from the net income for calculating taxes. This is because the principal is not money earned by a business and hence cannot be considered as income. This also means you don’t have to pay income tax on this amount.

Now, sometimes people take a personal loan but use it for their business. Does one enjoy tax benefits in such a case? Yes.

Say, you’ve taken a personal loan to pay your staff’s salaries. The taxation rules stay the same; you can claim a tax deduction on the interest amount, but not on the principal amount. This will reduce the business’ tax liabilities. While there is no upper limit on the amount that can be claimed as a tax-deductible expense, you do have to furnish a proof that the amount borrowed as the personal loan has been used for business purposes. So keep the bills and receipts safe to avoid running into troubles with the Income Tax authorities.

Now that you know of the tax rules associated with business loans, go ahead and borrow without worrying about tax implications. When looking to borrow money, be very thorough with your lender research and go with the one that gives you a good deal. In fact, you can also use a business loan EMI calculator available on many lenders’ websites to get a sense of repayments.

In today’s time, it is quite easy to get a business loan, not to mention the many benefits for those looking to grow their company. One important thing to remember is that the loan has to be repaid over a period of time. So, it is crucial to have a very clear idea of your requirements and your business situation before getting a loan.

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Created on Feb 27th 2020 11:42. Viewed 182 times.

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