Claim personal loan interest as deduction
The utilisation of personal loan for purchasing or repairing your house can reduce your taxable amount.
At the peak of the real estate cycle in 2007, a Mumbai-based software engineer Raghu G had taken a personal loan. This wasn’t to fund his household expenses or travel to Paris. He utilised the borrowed capital of Rs2.5 lakh to meet the downpayment amount for his house.
Now Raghu had taken a home loan, for the 85% of property price, but due to lack of savings he had to seek a personal loan. This utilisation of personal loan helped Raghu free up taxable income worth Rs40,000.
The principal amount repaid on the personal loan annually cannot be claimed. However, “The interest amount can be claimed for deduction based on the utilisation of the loan. If a house property is acquired, renewed, repaired or reconstructed using the personal loan the interest amount up to Rs1.5 lakh can be claimed for self-occupied properties as per Section 24 (B),” says Dr Suresh Surana, Founder-Chairman of RSM Astute Consulting Group.
On properties that are let out there is no limit on the amount of interest that can be deducted.
So if you have taken a personal loan to bridge the gap between downpayment and home loan, or to expand your living room, change the flooring and can prove it then you get an additional deduction on the interest payment made on the personal loan.
The borrower would have to produce evidence that the personal loan was actually utilised toward reconstruction, purchase or renovation of the house and not for personal consumption. The type of loan or the entity from whom the loan is taken doesn’t matter.
Make sure you exclude the amount paid to the broker for the property purchase before claiming a deduction on the personal loan.
If you have acquired an under-construction property then you can claim the interest amount in five instalments post the completion of project for five years. To claim this benefit, the project must have been completed within three years.
However, you shouldn’t take these steep-rate loans just because you can save on taxes. You would be better off saving first and then buying or repairing a house or borrow from relatives instead of bearing a 14-17% interest cost.