Understanding Loans, Types of Loans for Individuals & Businesses & Tax Benefits

The main purpose of a loan is to help people get out of financial trouble or finance fixed costs even if they do not have immediate cash available. Loans, such as financial products, are based on natural needs, which are often chosen to achieve certain goals.

For example, home building/purchase/renovation loan, higher education loan, repayment loan, new car or two-wheeler car loan, business loan to start a new or existing business, personal loan for emergency medical/marriage expenses, etc. However, while based on requirements, some loans offer certain tax benefits that may reduce the total tax liability of the borrower. In this article, we will understand loans, types of loans for individuals & businesses & tax benefits.

Benefits of Loans

• The lender will be more likely to determine the amount of loan they wish to offer you based on a few factors, such as repayment, income, and so on.
• The repayment period and interest rate will be linked to the total amount borrowed.
• The bank may apply a few payments and charges on all loans.
• Many lenders offer quick loans that take a few minutes to a few hours to repay.
• The interest rate is determined by the lender based on the guidelines of the Reserve Bank of India.
• The lender determines the need for security.
• Third party warranty may be used instead of security in some cases.
• Loan repayment should be made in equal monthly installments over a fixed term.
• There may or may not be a full/partial payment option.
• Some types of loans and lenders may charge a prepayment fee.

The borrower can take following types of loan-

Based on Provided Security

Secured loans:

These loans require the borrower to repay the loan. In the event that the borrower is unable to repay the loan, the bank reserves the right to use the promised security to repay the pending payment. The interest rate on such loans is very low compared to unsecured loans.

Unsecured Loans:

Unsecured loans are those that do not require any collateral to obtain repayment of the loan. The bank analyzes past relationships with the borrower, credit points, and other factors to determine whether a loan should be offered or not. The interest rate on those loans can be high as there is no way to repay the loan amount if the borrower fails to repay.

Based on purpose

Housing Loan

People who have received a home loan or home loan to buy a home can apply for a tax deduction from the principal and interest rates paid on the loan. In terms of Section 80C of the Income Tax Act, 1961, a person may require a tax deduction on the principal loan amount up to a maximum of Rs 1.5 lakhs. However, one can only claim the deductions under this section after a dwelling or house has been built and not before.

Individuals may also claim tax benefits under Section 24 of the Income Tax Act regarding interest paid on a home loan under the following conditions:

Tax deductions up to Rs 2 lakhs may be claimed if the construction of a dwelling or house is completed within three years from the end of the financial year for which the home loan is approved.

If the above scenario does not happen, the allowable tax deduction is only Rs 30,000.

With home loans obtained for the purpose of renovating or renovating an existing residence, individuals may apply for a tax deduction in terms of Section 24(b) of up to Rs 30,000 per financial year.

Education Loan

People who have received a loan for education may claim tax deductions and benefits under Section 80E of the Income Tax Act, 1961 with interest paid on payments made on the loan amount. Tax deductions may be required for a period of up to eight years on a student loan loan for higher education purposes. It is important to note, however, that tax deductions can be claimed only on interest rates and not on the principal loan amount. And tax deductions can only be claimed up to a loan period or eight years, depending on what happens soon.

Personal loan

People who have received a personal loan from a bank or financial institution may also be able to claim tax benefits and deductions on interest payments on their loan amount. However, these deductions cannot be claimed by the principal loan amount. Personal loan tax deduction applies only under the following circumstances:

If the loan is used to purchase, repair or build a dwelling as a house

Withdrawals may be claimed up to Rs 2 lakhs in terms of Section 24B of the Income Tax Act, 1961.

Automobile loan

Self-employed people who buy a car or a car, which will be used for business purposes, may require a tax deduction in the form of interest paid on the income generated by the individual business. The car in question will have to be purchased in the name of a personal business. Tax exemptions for cars can also be obtained by purchasing a car with a home loan.

Business loan

Business loans are often used by business owners to set up new businesses or expand existing businesses. A business loan may be secured on property or equipment or it may be unsecured i.e. provided without collateral. You can also get a few tax benefits on business loan repayments. The interest rate on a business loan repaid does not pay tax as it can be shown as part of the business cost but there is no capital tax return on the business loan.

Final words

We may not always have the money we need to make things or to buy things. In such cases, individuals and businesses/firms/institutions choose to borrow from creditors.

When a lender gives a person or company a loan with a guarantee or based on the belief that the recipient will repay the loan with certain additional benefits, such as interest rate, the process is called a loan or taking out a loan. A loan has three parts – the principal or loan amount, the interest rate and the duration of the loan for which availed.

Most of us prefer to borrow money from a bank or a reputable non-banking company (NBFC) as they are bound by government policies and are honest. Borrowing one of the main financial products of any NBFC bank or special offers (Non-Banking Financial Company).