Personal loan has become one of the more popular loans these days, despite the fact that they come with a high interest rate.
This is largely because it can be used to bridge your financial gap in case of emergencies. Very few individuals know that you can claim tax benefit for personal loans. It all depends on the use of the personal loan.
For the purpose of claiming tax deduction on the principal amount it would have to be from a prescribed lender. Hence, in the normal course there is no tax benefit that one gets on the principal amount.
It's extremely important to prove that the amount of personal loan taken was for the purpose of the house, in order to enable you to claim tax exemption. Hence, it may be necessary to ensure that your documentation is in place.
Why Tax Benefit On Personal Loans Should Not Be The Only Consideration?
As far as is possible it is best to take a home loan for buying, building or refurbishing a new house. This is because personal loans are one of the most expensive form of loans. They could come with interest rates ranging from 12 to 24 per cent.
Apart from this most personal loans come with processing charges and also pre-payment charges. In fact, home loans are much cheaper. Of course, for various reasons it not be possible for an individual to avail of a home loan, including inability to furnish all the required documents.
The one advantage of the personal loans is that in most cases there is no guarantor that is required. These days a personal loans can be extremely swift and unlike home loan where the documentation can be a cumbersome process, personal loans are granted faster.
However, as mentioned earlier, while the process maybe easier, personal loans have a much higher interest rate than a home loan. Also, the principal amount is not exempted from tax.
One can get a very high amount of personal loan to the tune of almost Rs 20 lakhs for an employed personal and up to Rs 40 lakhs for a self employed person. Personal loans have a payment tenure of up to 60 months.