How Interest on Personal Loans Affects your Tax Liabilities

How Interest on Personal Loans Affects your Tax Liabilities

Let’s be real—taxes are confusing enough. Throw personal loans into the mix, and it feels like a full-blown mystery novel.

You took a personal loan. You’re paying it back monthly. Life’s rolling. But then, tax season creeps in and suddenly you're wondering—"Is the interest I’m paying deductible? Is this loan silently hiking up my tax bill? Should I have done something differently?"

Don’t worry, you’re not the only one wondering.

Let’s break it all down—no jargon, no boring lectures, just the straight-up truth in language that doesn’t make your head spin.

First things first—are personal loans even taxable?

Here’s your answer on a silver platter: No, they’re not.

Personal loans are not considered income. That means the money you borrow isn’t taxable. The government isn’t going to demand a cut of that amount, because technically, it’s not “earned” money—it’s borrowed, and you have to return it.

So far, so good, right? But wait… things get interesting when we start talking about interest.

Interest: The sneaky little detail most people forget.

While the loan amount itself is tax-free, the interest you’re paying on it—month after month—is a different story.

Here’s where the confusion starts.

Can you claim a tax deduction on this interest? Will it help you save some money when filing returns? Or is it just money going out the window?

Let’s explore all the possible answers. Spoiler: it’s not black and white.

Scenario 1: You used the loan for your business.

If you’re an entrepreneur, freelancer, or side hustler who used the loan to keep your business running—great news.

You can potentially claim the interest as a business expense. That means it’s deductible from your business income, which can lower your taxable earnings.

Just make sure you have documents to back it up—bank statements, invoices, payment receipts. Because the Income Tax Department doesn’t take your word for it. They want proof.

So, if you spent that loan buying stock, machinery, or paying suppliers—yes, that interest could actually help you during tax season.

Scenario 2: You used the loan for investing.

This one’s a little trickier, but still promising.

If you borrowed the money and used it to invest in stocks, mutual funds, or even real estate, then the interest might qualify as a deduction under “interest on borrowed capital.”

But—and this is a big but—you’ll have to match every rupee of borrowed money to actual investments. Vague uses or mixed spending? That’s a red flag.

This area is filled with ifs and buts, so always consult a tax professional before trying to claim this. But yes, in principle, you could reduce your taxable investment income by showing the loan interest as a cost.

Scenario 3: You used it to renovate your home.

Maybe you borrowed to give your home a glow-up—modular kitchen, new tiles, or a shiny new bathroom. Can this help you save tax?

The answer is… possibly.

If the loan amount was used specifically for home improvement, and you can prove it with invoices and photos, you may be able to claim a deduction under Section 24(b). But this only applies in very specific cases, and unlike a standard home loan, a personal loan doesn’t automatically qualify.

So again—receipts are your best friend.

Now for the not-so-fun part: When interest gives you zero tax relief.

Let’s say you used your personal loan for a wedding. Or a dream trip to Europe. Or to buy the latest iPhone. Maybe you used it to pay off some other personal debts, or for medical emergencies.

We totally get it—life happens. But unfortunately, in these cases, you cannot claim any tax deduction on the interest. It’s seen as a personal expense, not a financial strategy.

So you’ll still have to pay that interest, but you won’t get any brownie points from the tax department for doing so.

But wait—can personal loan interest actually increase your taxes?

Good question. Directly? No. The loan itself doesn’t count as income, and the interest isn’t added to your taxable income either.

But here’s the twist: If you used that borrowed money to earn income, that income is taxable.

Let’s say you borrowed ₹2 lakhs, invested it, and made ₹50,000 in returns. That ₹50K is taxable.

Now, if you can’t deduct the interest you paid on the ₹2 lakhs, you’re effectively paying tax on the full ₹50K—even if your actual profit after interest is much lower.

That’s the indirect sting. You’re not paying tax because of the interest—but the interest is eating into your gains, and if you can’t deduct it, your tax bill might feel heavier than it should.

What if the lender waives your loan? Is that taxable?

This one surprises a lot of people.

If your lender waives off a portion of your loan—maybe due to settlement or financial hardship—that forgiven amount might be treated as income.

Why? Because from a tax perspective, you received money you didn’t have to repay. And that can be interpreted as a financial benefit, which is sometimes taxable.

It’s rare, but it happens. So don’t celebrate the waiver without checking the tax implications first.

Here’s your golden rule: Paperwork or it didn’t happen.

Whether you’re hoping for deductions or just want to stay safe at tax time, documentation is non-negotiable.

You’ll need:

• Loan agreements
• Bank statements
• Clear proof of how the funds were used
• Receipts for every rupee spent (especially for business or investment use)

Without that, even a valid deduction might get denied. So build a little digital folder—it could save you thousands later.

The bottom line: Borrow smart, plan smarter.

Personal loans can be powerful tools. They help you seize opportunities and handle emergencies. But when it comes to tax, they’re silent players—they won’t help unless you give them a strategic role.

Used the right way, the interest could actually reduce your tax burden. Used the wrong way, it’s just money out of your pocket—with no return.

Here’s where CredBuddha becomes more than just another personal loan provider.

We don’t just give you money—we help you use it wisely.

With CredBuddha, you get more than fast approvals and flexible EMIs. You get expert guidance on how to align your loan with your financial goals—including how it might affect your taxes. Business loan? Investment loan? Strategic borrowing? We help you map it all out.

Because at CredBuddha, we believe loans should work for you—not the other way around.

So the next time you're planning to borrow, let us show you how to make every rupee count—even during tax season.