Business loans are required at various stages of business activities like expansions, purchase of working capital, equipment etc., so as to maintain consistent cash flow for ensuring smooth business operations. Business loans carry an interest charge which is deductible as an expense from your gross income.
Are business loans tax-deductible in India?
Yes, business loans are tax-deductible in India. As per the provisions of the Income Tax Act, 1961 the interest component of the business loan is eligible to be deducted from profits earned in your business. The Income Tax Act further clarifies that business loans availed are not income from the business, through which the business earns profits.
Tax Benefits under Business Loan
- Interest charge on business loan - Business loan entails an interest charge which has to be paid back to the lender as part of the monthly instalment. The interest component of the business loan is eligible for a tax deduction as a form of an expense in the business income statement. The deduction lowers the overall business tax liability. The amount paid back to the lender in the form of interest is tax-deductible. Many businesses like those in the Micro, Small and Medium Enterprises (MSMEs) category can thus avail business loans as an apt method for business expansion and lowering tax liability. The principal amount availed from the lender is, however, not tax-deductible.
- Business expenses - Business loan availed can be utilized to meet the day-to-day business expenses for ensuring the smooth running of business operations. Business expenses like wages, office rent, stationery, advertising, bonus, etc. are key business expenses which have to normally be borne by businesses. Such expenses are deducted from the revenue earned to arrive at the net taxable income.
Tax Benefit on Business Loans - Key Points
- A business loan can be of various types like a term loan, working capital loan, bill discounting, small business loan, letter of credit, etc.
- Interest charge on all types of business loan is tax-deductible.
- Interest charge on personal loans taken for business is also eligible for a tax deduction.
- Interest on the business loan is normally subtracted from the gross business income.
- Claiming interest on a business loan reduces your total tax liability.
- Tax liability is calculated by deducting total business revenue from total business expenses.
- The principal component of the business loan is not a business expense and is not tax-deductible.
- The principal amount of a business loan does not offer any type of tax benefit
- Repayment component of the loan amount in the form of an equated monthly instalment is not eligible for a tax deduction.
Capital is required by businesses for ensuring a steady cash flow for running their business operations in a smooth and consistent manner. Business loans help to fill in this cash flow crunch for the businesses, as such is considered an integral component of a business. The interest component of such loans and business expenses undertaken are eligible for deducting from the business income, helping reduce the tax liability. So, one should avail of business loans to ensure business continuity and to lower the tax burden.
1. What type of loans qualify as business loans?
In India, all types of loans taken for business purposes qualify as a business loan. Major business loans include term loan, working capital loan, start-up loan, equipment financing, microloan, small business loan, overdraft, loan against property for SME, invoice financing, etc. Even a personal loan taken for business purposes qualifies as a business loan.
2. What is meant by interest on a business loan?
Interest on business loans refers to the interest accrued on the loan amount which is granted to the business owner, for running his business. Such interest forms part of the equated monthly instalment (EMI) of the total loan amount availed.
3. Will I get tax benefits for interest paid on a business loan?
Yes, interest paid on a business loan is eligible for tax deduction under the Income Tax Act, 1961. Interest paid on a business loan is an expense to be deducted from the gross income. As such, it is tax-deductible and helps the business in reducing the overall tax liability.
4. Will the principal amount of a business loan be a part of business income?
The principal portion of the business loan is a part of business income. Hence, it is not eligible for tax deductions.
5. Can I claim tax deductions if I plan to invest in another business?
Investing in another business could be through direct buying or in the form of supporting another business. If you have invested in the new business to run it actively, then you can claim the interest portion of the loan amount for a tax deduction. However, if the new business bought is solely for investment purpose and not for keeping it operational, then the interest amount of the loan is not eligible for tax-deduction.
6. Is the refinance of business eligible for tax deduction?
Refinancing a business involves undertaking a loan obligation in the form of revised rate of interest, rescheduled EMI payments or alteration to the original loan agreement. Going in for refinancing is beneficial for businesses as it helps them to increase savings from a long term perspective.
However, if the refinancing is required to repay the first lender, then it cannot be considered as a business expense. In such a case, the interest paid on the first loan will not qualify for a tax deduction. However, the interest paid on the second loan taken is eligible for tax deduction.
7. When can I claim the tax benefit on interest paid on a business loan?
The interest accrued on the loan can be considered as a part of business expenses for the financial year in which it falls due. Tax benefits can be claimed during the same financial year.