Understanding Loans- Types,Documents,Eligibility, Tax Benefits in India

Understanding Loans- Types,Documents,Eligibility, Tax Benefits in India

Loans are among the most useful financial products, especially for people who need funds for their business or personal needs. 

Loans can be taken from banks or financing institutions and can be financed by various types of loans such as personal loans, student loans, housing loans, car loans and more.

What are Loans?

Loans are a form of debt. They're used for personal, business and investment purposes. 

Loans can be taken from banks, financial institutions, friends and family members.

Types of Loans for Individual

There are various types of loans for Individuals -

  • Wedding Loan
  • Home Renovation Loan
  • Medical Loan
  • Higher Education Loan
  • Small Personal Loan

1. Wedding Loan 

A wedding loan can be a great way to help with the cost of the wedding. Whether you are getting married or your family is, a wedding loan may be one of your best options for financing the big day. Wedding loans are available for both men and women.

2. Home Renovation Loan 

Home renovation loans are loans that can be used to renovate your home. These loans will help you get a brand new kitchen, bathroom, or even a new paint job for the walls.

You can also use the funds from this kind of loan for other home improvement projects like adding an extension or building an extra room in your house.

What is the maximum amount that can be borrowed?

The maximum amount that can be borrowed will depend on several factors, including:

  • Your credit score – If you have good credit, then it is likely that you will be able to borrow more than someone who has poor credit.
  • The value of your property – The higher the value of your property usually means that there is more equity in it, so banks will consider lending larger amounts against it as well

3. Medical Loan 

A medical loan is a type of personal loan that can be availed by Indians who need money for medical expenses. 

A medical loan helps you pay your hospital bills or any other associated health-related costs.

If you are looking to take a personal loan for any purpose, including medical purposes, then you can apply online using our services at swiftloanindia.

There are numerous benefits of taking a medical loan:

  • You can borrow up to 75% of the total cost of treatment from banks and NBFC (non-banking financial companies) in the country. This will help you meet all your needs without worrying about the cost burden associated with it
  • The interest rate on these loans is much lower than other types of personal loans, such as housing loans and car loans
  • The processing time involved in getting approval for such loans is quite short compared with other alternatives, like asking friends/family members/relatives for help.

4. Higher Education Loan 

A higher education loan is a type of educational loan that is available to students to help finance their studies. 

The eligibility criteria for higher education loans may vary from lender to lender. However, most banks offer this facility only to those who have secured admission to recognized institutions.

Students can apply for higher education loans either through the bank's website or by visiting the branch near their residence. 

The bank requires filling up an application form and submitting relevant documents such as identity proof, mark sheets, etc., as per its requirements.

Interest Rate on Higher Education Loans Banks charge an interest rate on such loans, but it varies from one bank to another depending upon the type of customer (individual/business). 

Apply for a personal loan from ICICI Bank. You will pay a 9% - 10% interest rate on your monthly instalment, but if you want any business loan, you need not pay any processing fee, just a nominal processing fee like 1% - 2%.

5. Small Personal Loan 

In the context of personal loans, a small personal loan is a loan amount which ranges from Rs 50,000 to Rs 2 lakh. 

These are unsecured and need no collateral. You can apply for this type of loan online or by visiting your nearest branch using an online application form that has been made available by banks. 

You can get approved for this kind of loan within 24 hours, and it will be disbursed to your bank account within 1-2 working days once the approval process is complete.

Benefits: The most important benefit of taking up a small personal loan is that it offers you access to funds even if you have a bad credit history or do not have enough income to pay off your debts…

You can also use these funds for any purpose—whether it's buying a new car or paying off an existing debt owed to someone else—as long as whatever reason you have for applying for this type of loan will help improve your financial situation over time (i.e., not just make things worse).

Loan for Businesses

If you are a business, then you may require loans. Many companies provide funds to businesses for various purposes, such as opening a new branch, buying new machinery or for working capital requirements. 

The repayment of these loans is also taxable under the Income Tax Act 1961, and this is how tax benefits on the repayment of a loan by a business in India have been provided by the government.

The following are some of the examples where tax benefits on different loan types in India include:

  • Interest paid on home loans for house construction up to Rs 60 lakhs per individual is exempt from income tax under section 80C (2).
  • Interest paid on education loans up to Rs 10 lakhs per student per year attracts a deduction under section 80E(3).
  • Interest paid on bank fixed deposit accounts (FD) up to Rs 50 lakhs attracts exemption under section 194A(a)(ii).

Tax Benefits on Repayment of Loan to an Individual in India

The tax benefits on repayment of loans are as follows:

  • You can claim a deduction under section 80C of the Income Tax Act, 1961, for interest paid on a home loan. The maximum amount covered is Rs 2 lakh per year.
  • Interest paid towards education loans is eligible for deduction under section 80E of the Income Tax Act, 1961, subject to a maximum deduction of up to Rs 2 lakh per year. However, if you pay more than this amount over three years, it has to be claimed as an exemption and not as a deduction. So if your total payment exceeds Rs 4 lakhs in three years (or Rs 2 lakhs in one year), then you can claim exemption on this amount instead of claiming deductions under section 80E(1)(b).
  • In addition to these two exemptions above, two other kinds could come into play depending upon whether they are repaid or not:

If you have a home loan and repay it within three months of taking it, then the interest paid on that loan is not taxable. 

If you have an education loan and repay it within six months of taking it, then the interest paid on that loan is not taxable.

Tax Benefits on Repayment of Loan by a Business in India

You can claim a tax deduction on corporate loans if you are a business. The amount of interest paid on borrowings is deductible from your business's profits and taxed at a lower rate.

You can also claim an additional deduction of Rs 10 lakhs in case you have repaid all your debts within one year from the end of the financial year in which the loan was taken. 

The additional deduction is limited to a maximum of Rs 1 crore for all outstanding loans by each assessee (individual or HUF).

The interest paid on loan taken for business purposes is fully deductible. There are no restrictions on the deduction of interest paid on loans taken by a company, partnership firm or proprietorship concern.

However, the interest paid on loan taken for personal purposes is not deductible. 

The deduction of interest paid on loans taken for business purposes is limited to Rs 25 lakhs per year for companies and Rs 20 lakhs per year for other taxpayers (individual or HUF). 

Suppose you repay your loan within one year from the end of the financial year in which it was taken. 

In that case, an additional deduction of 10% of the principal amount can be claimed in addition to the above-mentioned deductions.

Tax Benefits on Different Loan Types in India

Here we have discussed different types of deductions that can be availed. 

1. Education Loans – Deduction under Section 80E

You can avail of a tax deduction on the interest paid for education loans under Section 80E of the Income Tax Act, 1961. The eligibility criteria for taking this deduction are as follows:

  • You must have paid interest on an educational loan taken from any financial institution or non-banking financial company (NBFC).
  • Your gross total income should not exceed Rs 10 lakhs in the given financial year, and your taxable income should not be less than Rs 5 lakhs during this period.

2. Home Loans – Tax Deductions under Section 80C, Section 24, Section 80EE, Section 80EEA, and CLSS

The following are the tax deductions under Section 80C, Section 24 and other sections:

  • Under Section 80C, you can claim up to Rs 1.50 lakh deduction on interest repayments in your home loan account. This would include repayment of the principal amount as well as interest paid on the same. The maximum deduction that you can claim will vary based on whether or not the property is self-occupied or rented out. For instance, if it is rented out, only 50% of eligible expenses will be considered for tax deduction purposes.
  • As mentioned earlier in this article, two different types of home loans are available: one with a fixed rate and another with variable rates (where the repo rate changes every month). When it comes to claiming taxes on these two types of loans separately, there isn't much difference between them when comparing their tax benefits under Section 24, but here's how both options stand when compared against each other.

2.1Tax Deduction under Section 80C

You can claim tax deductions under Section 80C for investments in certain schemes.

  • Investments in Public Provident Fund (PPF), National Savings Certificate (NSC) and Tax Saving Fixed Deposits are eligible for tax deductions.
  • Payments towards Premiums of Mediclaim Policies, Life Insurance Policies, Loan against Policy and Prepayment of Home Loans are eligible for tax deductions.

2.2. Tax Deduction under Section 24

  • Section 24 allows you to deduct the interest paid on a home, car, and other personal loans.
  • The deduction is available only if the loan amount is more than Rs. 1 lakh.
  • The deduction amount depends on the loan's interest rate and tenure.

2.3. Tax Deduction under Section 80EE & 80EEA

If you have availed of any of the above loans and paid interest on them, you can avail of a tax deduction under Section 80EE or Section 80EEA. 

The maximum limit of deduction that can be claimed for both these sections is Rs 2 lakhs per year.

2.4. Section 80EE: Tax Deduction for Education Loans

You could claim a tax deduction under this section if your loan were taken to fund your child's education or to pay tuition fees charged by an institution/college/schooling centre approved by the Central or State Government*.

However, if you took a loan to finance your own studies rather than your children's, this section won't be applicable.

2.5. Section 80 EE

There are many tax benefits under Section 80 EEE which include:

  • Credit Linked Subsidy Scheme (CLSS) for home loan borrowers
  • Interest subsidy on housing loans up to Rs 6 lakhs can be claimed over a period of 20 years or until the construction is completed, whichever is earlier. The benefit amount will be calculated based on the principal minus interest paid during the construction period with effect from April 1, 2018, onwards.
  • Home Loan Eligibility Criteria

2.6. Section 80 EEA

Under Section 80EEA, you can claim a deduction of up to Rs.1 lakh on the principal repayment of your home loan. 

This is over and above the deductions under Section 24 and Section 80C. The maximum amount of deduction is Rs.2 lakh.

Eligibility Criteria

You need to be a salaried individual with a minimum income of Rs. 20,000 per month, and the maximum loan amount should be Rs. 6 lakhs.

2.7. Deduction amount of Section 80 EEA

Section 80 EE of the Income Tax Act is a tax deduction available to an individual who is repaying an education loan. 

The maximum deduction allowed is Rs. 2 lakhs per year, and it can be claimed for a maximum period of 15 years.

2.8. Credit Linked Subsidy Scheme (CLSS)

The Credit Linked Subsidy Scheme (CLSS) is a scheme for the benefit of small and marginal farmers. 

The CLSS is a scheme under which banks provide interest subsidies for lending to eligible farmers.

  • Loan amount: Loans can be availed up to Rs 1 crore with an interest rate of 8% per annum and up to Rs 2 crore with an interest rate of 7% per annum, subject to a maximum repayment period of 15 years from the date on which the loan was processed
  • Personal Loans – Indirect Deductions as Per Use of the Loan

Indirect Deductions as Per Use of the Loan

The following table shows you some of the deductions that can be claimed through your loan:

  • Section 80C – This section allows tax deduction under three different heads: life insurance premium, health insurance premium and long-term capital gains on the sale of securities or equity mutual funds. You can claim a maximum of Rs 1 lakh annually under this head.
  • Section 24 – The amount paid towards investment in a provident fund is also eligible for tax deduction under this section. You can claim a maximum deduction of up to Rs 1 lakh per year from your gross salary income.
  • Section 80EE & 80EEA – These two sections allow you to claim an additional deduction on interest paid for educational loans taken for higher education courses like post-graduation and doctorate degrees etc. However, suppose you are already claiming a deduction under any other section. In that case, it will not be possible for you to avail of this benefit, too, since there's a cap on how much can be claimed as deductions in total via various sections specified by Income Tax Rules every financial year (FY).
  • Car Loans – Tax Deductions under Section 43B and Section 32

If you are planning to buy a car or any other vehicle, it is essential for you to know about the tax benefits available on your purchase. 

You can claim the deduction under Section 43B or Section 32, reducing your taxable income and saving you from paying maximum taxes.

Section 43B: This section helps you to avail of tax deductions for home loans up to Rs. 75 lakhs and education loans up to Rs. 25 lakhs in a financial year (FY). The interest paid on these loans will be eligible for deduction under this section as per the following slabs.

  • For interest paid between 1 st day of April 2019 and 31 st March 2020  – 30% of the amount of Interest Paid
  • For interest paid between 1 st day of April 2020 & 31 st March 2021  – 40% of the amount of Interest Paid
  • For interest paid between 1 st day of April 2021 & 31 st March 2022  – 50% of the amount of Interest Paid

Many types of loans are available, depending on your need and situation.

Many types of loans are available, depending on your need and situation. Loans can be taken from banks and non-banking financial companies for different purposes.

  • If you are an individual looking for a personal loan to meet your needs, there is a wide range of options available for you.
  • Businesses also have a wide variety of choices when it comes to financing their operations by taking out business loans.

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So, this is all about the loan. I hope you have all the information about the different types of loans and their tax benefits in India. If you have any queries, feel free to Contact us.

FAQ's Related to Loans

1. What is a loan?

A loan is an amount of money borrowed from a lender for a fixed period and at an agreed interest rate. The borrower must repay the principal amount and interest on or before the maturity date. If you take a loan, you become indebted to your creditor until you repay the borrowed money.

2. Why do I need loans?

The reasons can be multiple:

  • You want to buy something that costs more than what you currently have in your bank account or have enough cash available at hand;
  • You have some immediate expenses like medical bills or educational fees which are pending and need to be paid immediately;
  • Your credit score is low; there are several other possible reasons, too, but these will not apply in most cases when people take out loans without any prior planning and end up getting into trouble later on.

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