Tax Benefits on Business Loan in India

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The interest you pay on your business is tax deductible that is generally subtracted from your gross income. As per the Income Tax Act, 1961, you can avail deduction on business loan interest that is paid from business profits. It is predefined in the Income Tax Act that money utilized in the form of business loans is not the same as business income, earning revenue or profit for the business.

Availing a business loan comes with a lot of benefits as the business owner can use the funds for various purposes and get a tax benefit on the interest paid to the lender. In whatever way the funds are being used, a borrower can enjoy tax benefits and lower his/her tax liability. The amount paid back to the lender for the business loan availed is known as the interest amount. 

Are Business Loans Tax-Deductible in India? 

Yes, business loans are tax-deductible in India. As per the provisions of the Income Tax Act, 1961 the interest component of the business loan is eligible to be deducted from profits earned in your business. The Income Tax Act further clarifies that business loans availed are not income from the business, through which the business earns profits. 

Key points of Tax Benefit on Business Loans

  1. A business loan can be of various types like a term loan, working capital loan, bill discounting, small business loan, letter of credit, etc. 
  2. Interest charge on all types of business loan is tax-deductible.
  3. Interest charge on personal loans taken for business is also eligible for a tax deduction.
  4. Interest on the business loan is normally subtracted from the gross business income. 
  5. Claiming interest on a business loan reduces your total tax liability.
  6. Tax liability is calculated by deducting total business revenue from total business expenses.
  7. The principal component of the business loan is not a business expense and is not tax-deductible.
  8. The principal amount of a business loan does not offer any type of tax benefit
  9. Repayment component of the loan amount in the form of an equated monthly instalment is not eligible for a tax deduction.

Tax Benefits on Business Loan – At a Glance

  • Business loan interest amount is tax exempted
  • Principal loan amount is not tax deductible and do not offer any tax benefit
  • The interest paid on a business loan is usually deducted from the gross income
  • Personal loan taken for business purposes is also tax deductible
  • Helps in the reduction of total tax amount to be paid
  • Tax liability is calculated by subtracting business expenses from total business revenue
  • To avail the deduction on interest, you need to fulfil some basic criteria defined by the lender
  • Business loan borrowed by the lender is a type of funding and not your income, so it is not tax deductible
  • Repayment amount that is form of EMI is not tax deductible

Tax Benefits Provided By The Tax Authorities of India

1. Interest Paid on Business Loans

The amount paid back to the lender in the form of interest is tax-deductible. A tax deduction in finance parlance refers to the deduction that lowers a person’s tax liability by lowering their taxable income. Besides, the business expenses that are used to grow the business is also tax-deductible.

In essence, borrowers can benefit from a business loan as they can deduct the interest amount from the business expenditure to arrive at the taxable amount. It is thus an effective tool for Micro, Small and Medium Enterprises (MSMEs) to lower the tax liability and use the funds for expanding the business.

The principal amount availed from the lender is, however, not tax-deductible.

2. Business Expenses

Business expenses that are incurred to run and maintain operations can also be subtracted from the overall business revenue to arrive at the taxable income. Below is the list of business expenses that are not a part of business revenue. (Gross Revenue – Tax-deductible Expenses = Taxable income)

  • Wages paid to the employee
  • Office rental cost of the office premises
  • Office supplies such as stationery
  • Expenses incurred on the insurance of business
  • Advertising and marketing expenses
  • Bonus paid to the employees

Additional Benefits of Business Loans

Despite getting acquainted with the many tax benefits that apply when taking a business loan, some people may still be wary about applying for a loan for business. So, let’s take a look at some of the other ways that a business loan can act as a saviour for your company apart from being tax-deductible.

  1. Financial institutions understand that businesses in growth mode require constant funding for successful expansion. And so, to avoid putting a halt on your company’s growth, they disburse loans quickly.
  2. A business loan requires minimal documentation and business loan eligibility. In fact, some financial companies do not even ask for any collateral from the applicants.
  3. In today’s date, lending institutions offer a loan for business which can be completely customised to cater to the exact needs, demands and specifications of the applicant.