Personal loans are generally offered at high interest rate when compared to other loans. Moreover, there are no direct tax benefits available on taking a personal loan. But not all hopes are lost. As per Section 24 of Income Tax act, one can claim tax deduction on the interest paid on the personal loan if the loan is used for the purpose of construction of a residential property. You must substantiate your claim with valid proof of the expenses to the construction.
You can claim tax deduction for up to Rs.2 Lakhs on the interest paid on the personal loan. Section 24 is known as ‘Deduction from Income from House Property’. Any income paid from borrowers’ capital is eligible for tax deduction.
Apart from the purpose of constructing a house, interest paid on the personal loan can also be used for tax deduction if the purpose is genuinely for business investment or any other purchase of asset.
If the amount is used for purchase of any asset other than property, it would be considered capital gain and any interest paid is eligible for tax deduction. Unlike property, business investment and purchase of asset do not have any limit on the tax deduction. For all the claim you are making, there should be a valid proof furnished for a successful tax refund.