Is Income Tax Deductible on Personal Loan Interest?

The Basic Rule - No Deduction on Personal Loans Repayment

There is no deduction in income tax for interest paid on a personal loan. Unlike home loans, education loans or business loans, personal loans do not have a dedicated tax benefit provision. The government's logic is simple, since personal loans can be used for anything (a holiday, wedding, medical expenses or shopping), there's no specific benefit to incentivise.

What about the principal repayment?

Just like the interest, the principal amount you repay on a personal loan is also not eligible for any tax deduction. With home loans, you can claim principal repayment up to ₹1.5 lakhs under Section 80C. No such benefit exists for personal loans.

Scenarios where personal loan interest gets a tax benefit

Now here's where it gets interesting. Although the loan is called a ‘personal loan’, what matters for tax purposes is what you actually used the money for.

If you can prove that the personal loan was used for specific purposes and the money spent there is eligible for tax benefits, you might be able to claim deductions.

Let's look at these scenarios,

For home purchase or construction

If you used your personal loan to purchase or construct a residential property, you can claim the interest under Section 24(b) of the Income Tax Act. You can claim up to ₹2 lakhs per year as a deduction on the interest paid. However, you need to provide proper documentation proving that the loan amount was indeed used for buying or constructing the house.

This means bank statements showing the money was transferred to the builder or seller, the sale deed, construction bills and other relevant documents.

For business purposes

If you are self-employed or run a business and use the personal loan for business expenses (buying equipment, inventory or working capital), the interest can be claimed as a business expense.

This reduces your taxable business income. You will need to maintain all relevant records showing how the loan was utilised in your business and declare this in your income tax returns.

Why is Documentation Worth the Hassle?

Even if you used your personal loan for eligible purposes, claiming tax deductions is tricky.

Personal loans don't come with specific end-use certificates like home loans or education loans do. The bank doesn't track how you spent the money. So the burden of proof entirely falls on you.

You will have to maintain

• Bank statements showing fund transfers
• Bills and receipts for purchases
• Property documents (for home-related claims)
• Business records (for business-related claims)
• A clear audit trail connecting the loan to the specific expense

Without solid documentation, your tax claim could be rejected during assessment, leading to penalties and interest on unpaid tax.