As you know, running a business requires a huge amount of capital investment, and to meet the financial needs that’s where business loan come. But many people might not know that business loan also have tax benefits. How can you get the tax benefit? Let’s understand here.
Just a quick overview of Business Loans: It’s a financial product offered by banks and non-banking financial companies (NBFCs) to businesses for various purposes, such as expanding operations, purchasing equipment, managing working capital, or covering other business-related expenses. These loans can be secured or unsecured, depending on the lender’s requirements and the borrower’s creditworthiness.
Purpose-Specific: Business loans are designed for specific needs, like growing your business, buying equipment, or covering day-to-day expenses.
Interest Rates: Interest rates can change based on your credit score, how long you want the loan, and the lender’s rules.
Repayment Tenure: You mostly have 1 to 5 years to pay back a business loan, depending on how much you borrow and why.
Collateral: Some loans need collateral, like property or equipment, while others don’t require any security.
When you get a business loan, you can't deduct the loan amount from your taxes, but you can deduct the interest you pay on the loan. This can lower your taxable income and help your business financially.
Interest on Business Loans is considered a business expense under the Income Tax Act, 1961. This means the interest you pay on your Business Loan is deductible from your taxable income, reducing your overall tax liability.
How it Works:
Tax Deduction: You can deduct the interest you pay on the loan from your business's total income when figuring out your taxes.
Applicable to All Businesses: This deduction is available for all types of businesses, including sole proprietors, partnerships, and private companies.
Example:
Suppose you took a Business Loan of ₹10,00,000 at an interest rate of 12% per annum. The annual interest payable would be ₹1,20,000. You can deduct this ₹1,20,000 from your business income when calculating your taxable income, thus reducing your tax liability.
Important: The principal repayment of the Business Loan is not eligible for tax deductions; only the interest component is deductible.
There are certain expenses that can be allowed as deductions and these expenses should be directly related to your business expenses. You should know that not all expenses can be deductible.
Below are some common exemptions for expenses:
Rent
Employee wages or benefits
Marketing
Insurance of business
Maintenance or repair-related costs
Key Points:
Purpose of Loan: The loan should be used for business purposes, such as purchasing assets, expanding operations, or managing working capital.
Timing of Deduction: The interest is deductible for the year in which it is paid or accrued, depending on the accounting method used by the business (cash or mercantile basis).
If you use the Business Loan to purchase capital assets like machinery, vehicles, or office equipment, you can claim depreciation on these assets under the Income Tax Act.
Key Points:
Depreciation Deduction: Depreciation is a non-cash expense that reduces your taxable income. The rate of depreciation varies depending on the asset type.
Additional Depreciation: In certain cases, businesses may be eligible for additional depreciation on new assets, providing further tax relief.
Section 32: Depreciation is claimed under Section 32 of the Income Tax Act and is allowed on both tangible and intangible assets.
Example:
Suppose you purchase machinery worth ₹10,00,000 using a Business Loan. If the applicable depreciation rate is 15%, you can claim a depreciation deduction of ₹1,50,000 for the year, thereby reducing your taxable income.
Important: The depreciation benefit is separate from the interest deduction, allowing you to claim both and further reduce your tax liability.
If your business loses money after paying all expenses, including loan interest, you can use that loss to reduce taxes on other income or apply it to future years.
Key Points:
Set-Off: You can use business losses to lower taxes on income from other sources.
Carry Forward: If you can't use all the loss this year, you can carry it forward for up to eight years to reduce taxes on future profits.
Example:
If your business incurs a loss of ₹5,00,000 in a financial year, you can set off this loss against income from other sources (e.g., rental income) or carry it forward to future years to reduce your tax liability.
To fully leverage the tax benefits associated with Business Loans, it’s essential to follow some practical tips:
Make sure to keep clear records of all loan-related expenses, like interest payments, fees, and what the loan was used for. This paperwork is important for claiming deductions and for any tax checks.
Tax laws can be complicated, so it's a good idea to talk to a tax advisor or accountant. They can help you understand the rules and make the most of your tax benefits. They also assist with planning to make sure you follow tax laws correctly.
To get tax benefits, you must use the business loan only for business purposes. If you mix personal and business expenses, you could lose deductions and face legal problems.
By planning your loan payments wisely, you can improve your cash flow and get more tax benefits. For example, timing your interest payments with your business income can lower your taxable income during high-income years.
You can claim several deductions for your business loan, like interest payments, depreciation on assets, and business losses. Using these deductions together can greatly lower your taxes.
| Tax Benefit | Description | Section of Income Tax Act |
|---|---|---|
| Interest Deduction | Interest paid on Business Loans is deductible from taxable income. | Section 36(1)(iii) |
| Depreciation on Assets | Depreciation on assets purchased using Business Loans can be claimed as a deduction, reducing taxable income. | Section 32 |
| Set-Off and Carry Forward of Business Losses | Business losses after accounting for loan interest can be set off against other income or carried forward for up to eight years. | Section 71, 72 |
Business loans are important for getting money to grow your business. The loan also offers tax benefits that can lower your taxes.
To make the most of these benefits, keep good records, talk to a tax advisor, and use the loan only for business expenses. With careful planning, a business loan can help you reach your goals and reduce your tax costs.
How can EazyBankLoan help you in taking a loan?
We understand that getting a loan can be very stressful with confusing documents, unclear communication, and various other challenges. That is why we take care of your loan application process, saving you time and hassle by handling the paperwork and communicating with the loan providers.
Check the details here at EazyBankLoan
Need help? Reach out at support@eazybankloan.com
No, the principal repayment of a Business Loan is not tax-deductible. Only the interest paid on the loan is eligible for tax deductions.
No, tax benefits on Business Loans are available only if the loan is used strictly for business purposes. Loans used for personal purposes do not qualify for these deductions.
You can claim the interest deduction by showing the interest paid as a business expense in your profit and loss account. This will reduce your taxable income.
No, there is no upper limit on the amount of interest that can be deducted as a business expense under the Income Tax Act.
Yes, you can claim depreciation on assets purchased using a Business Loan. Depreciation is allowed under Section 32 of the Income Tax Act and can further reduce your taxable income.
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