Are Personal Loans Considered as Income for Tax Purposes?

A personal loan is an important financial tool to avail instant credit. Since it is an unsecured form of financing, you are not required to provide any collateral on the loan. The lender determines your creditworthiness by viewing your credit history and credit score. Thus, the rate of interest on personal loans is higher to cover the risk of a possible default.

While preparing your ITR (Income Tax Return), you’ll need to submit paperwork and forms containing details of your income, expenses, and assets. You might have wondered if personal loans are taxable and if you can avail any tax benefits on personal loans. Generally, a personal loan is not taxable because it is not considered as an income.

Here are some ways you can approach your loans while filing for your income tax returns.

Do Personal Loans Count as Income?

A personal loan can be used for a variety of reasons such as covering medical bills, home renovation, wedding expenses, financing your child’s higher education, etc. Numerous banks and financial institutions offer unsecured personal loans at attractive rates to eligible borrowers. An individual’s credit score, credit history, and monthly income are some of the key factors that determine her/his creditworthiness as a borrower.

However, your income is classified as money that you earn, whether you are a salaried individual or a self-employed professional; hence, loans are not considered as income. You borrow money with the intent of paying it back and don’t earn any money from your loan. Whether you avail it from a bank, credit union, peer-to-peer lender, or another financial institution, you don’t need to report the personal loan on your income tax return.

Are Personal Loans Taxable?

Personal loans are debt and not an income. Hence, you are not required to report them on your income tax. There are some instances where you might face tax implications from a personal loan. If you receive a personal loan from a friend or family member, there may be other tax implications, but the funds won’t be taxable for you.

What to do if Your Personal Loan Gets Cancelled?

Timely loan repayments ensure a smooth process, but if you’re falling behind on your payments or can’t afford the loan, there’s a higher chance of it being cancelled. This cancelled debt is then considered as an income, even if it is made up of fees and interests. Hence, as a borrower, you may need to pay income tax on the portion of a personal loan amount that is forgiven or discharged. The lending institution issues a cancellation of debt (COD) on the loan amount, which states that you’re not responsible to repay the loan. You then need to report this cancelled amount as income to the taxman.

Are Personal Loan Interest Payments Tax Deductible?

It is not possible to deduct the interest rate on personal loans. However, if you’re able to show that you used the personal loan funds for business requirements, your interest payments may be tax-deductible. But before claiming it on your taxes, you need to consult a tax professional to avoid any confusion.

When it comes to tax planning, a personal loan does not have much importance and availing and repaying one does not affect your taxes. These loans generally come with longer repayment terms, offering more breathing room with your repayment plan.

At Finserv MARKETS, you can avail a Bajaj Finserv Personal Loan amount of up to Rs. 25 lakh at an attractive interest rate starting as low as 12% per annum. The flexible loan repayment tenure on the loan usually ranges from 1 to 5 years. You can choose your tenure and repay the loan amount effortlessly.

With the Finserv MARKETS app, you can easily apply for a loan online and get access to value-added services like a free CIBIL score check. Also, you get an online Financial Health Check Report (FCHR) that helps you understand your finances and improve your overall credit health.

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