When it comes to loans, a significant query is that of whether the beneficiary would be able to avail of tax deductions or not. If you are thinking about getting a business loan, there is good news. You can avail of tax benefits on a business loan.
According to the Income Tax Act 1961, based on the interest that you are required to pay on your loan, you can avail of tax deductions that are subtracted from your gross income. As per the guidelines of the Income Tax Act 1961, you can qualify for tax deductions on the interests you pay for your business loans.
What is a business loan?
Business loans are a system of arranging funds that one might need to expand or fulfil business-related requirements, such as buying manufacturing-related units, office spaces, inventory building, etc. It is an instant cash arrangement aid offered by banks, NBFCs, and other financial institutions when a person needs funds for the betterment of his or her business.
Business Loan Interest
Business loan interest is the surplus amount that a borrower is required to pay to the lender to avail of the loaned funds. The amount of interest is paid on the total amount that has been borrowed. In this case, the good news is that you will be eligible to access tax deductions or benefits on the amount of interest you are paying on your business loans.
Taxes associated with business:
A business owner needs to gather knowledge about the taxes associated with a business loan for more efficient financial planning and correct ITR filing. The taxes endured by a business owner in India are:
- The Corporate Tax: This tax is levied only on the limited companies in the business. The tax is paid based on the business profits and as a percentage of total taxable income. The company itself calculates this tax. As per the latest statistics about 20% of the business's profits.
- VAT: The Value Added Tax is another common tax levied on a business. Such tax is utilized by those businesses which are linked with buying and selling of goods. This tax is added over the normal tax amount as a means of availing the goods and services.
- National Insurance: Such a tax is paid directly to the HMRC as part of the business's salary. Naturally, these taxes shall be associated with the large business.
- Income Tax: This tax is normally associated with working professionals. In the business world, income tax returns are generally associated with solo business owners and self-employed individuals.
Tax Deductibles on Business Loan Interest
A borrower gets the advantage of tax benefits on business loans that he/she pays as per the guidelines of the Income Tax Act, 1961. As loan interest amounts can easily be equated to business expenditure, it is because of this that the borrower can avail of tax benefits on the same. It can come as a blessing for start-up firms and entrepreneurs, as it helps them in saving a generous amount of money.
The interest from a business loan will not be suitable for a tax exemption under the following scenarios:
- A business owner cannot claim a deduction on the interests earned from a business loan that has been refinanced. Only those loan interests are exempted from tax deductions that belong to the earnings from the new loan.
- In case a business owner has applied for a loan to purchase a real estate property, then the fee garnered from such purchase is not deductible under tax benefits.
- Also, the interest which has been capitalized cannot be used as a deductible.
- Many times, the lending authority may charge a fee for keeping the loan funds on standby. The borrower cannot mention such a fee under interest payments and claim it for a tax deduction.
Eligibility Criteria to avail Tax Deductions on Business Loans
The following entities are eligible to apply for tax benefits on business loan:
- SMEs
- MSMEs
- Small businessmen
- Retailers
- Manufacturers
- Entrepreneurs
- Traders
- Private limited companies
- Public Limited companies
- Proprietorship
- Partnership firms
- Limited liability partnership firms, etc.
The borrower must be 18 years old (minimum) at the time of loan initiation and 65 years (maximum) of age at the time of maturity of the loan to be eligible for tax benefits. The minimum amount of loan must be Rs. 10,000 and the maximum Rs. 50 lakh. However, the maximum ceiling might be extended, depending on the applicant's requirement and profile, to up to Rs. 10 crores. The applicant's nationality needs to be Indian, and he/she must not hold any criminal records in the past or at the time of loan application. The repayment tenure window is from 12 months to 60 months.
HIGHLIGHTS:
| Eligible Candidates | SMEs, MSMEs, traders, entrepreneurs, partnership firms, retailers, manufacturers, public and private ltd companies, proprietorship, etc. |
| Age of Entry | 18 years old (minimum) at the time of loan initiation 65 years old (maximum) at the time of loan maturity |
| Amount of Loan | Rs. 10,000 (minimum) Rs. 50 lakhs (maximum) can be extended up to Rs. 10 crores |
| CIBIL/Credit Score of Entity | 650 and above |
| Tenure of Repayment | 12 months to 60 months |
| Nationality | Indian |
| Legal Status | should not hold past or present criminal records |
| Existence of Business Entity | 2 years (minimum) |
| Experience in Business | 1 year (minimum) |
| Turnover of Company | To be decided by the lender |
Types of Business Loans
There are various types of business loans that you can avail of for your firm or start-up. The types are given below:
- Bill Discounting
- Equipment Finance
- Farm/Construction Equipment Finance
- Letter of Credit
- Machinery Loan
- Merchant Cash Advance
- Micro Loan
- Overdraft Facility
- Small Business Finance
- Term Loan (available in both short- and long-term loans)
- Working Capital Loan
Business loans that offer Tax benefits:
This is a point of consideration for business owners as not all business loans will make them eligible to avail of tax benefits. Business owners should remember these concepts before deciding the type of business loan they wish to apply for. Some of the business loans that offer tax benefits to the business owners include:
- A Term Loan: Such loans provide a lump sum amount to the applicant that is to be repaid in a fixed time schedule.
- Line of Credit Loan: Another great option for maintaining working capital in a business. Unlike term loans, the line of credit loans doesn't impose a set time limit on loan repayment.
- Short-term loans: These loans also provide several tax benefits to individuals.
- Personal loans: Such loans are aimed to accomplish a one-time large purchase. These loans also provide tax benefits to individuals.
Things to Remember while availing Tax Exemptions
You must remember some limitations while availing of tax benefits on a business loan in India.
- The principal loan amount is not tax-deductible. Therefore, it would not offer any kind of tax exemptions to you.
- Tax liability is the amount that gets extracted by subtracting business expenses from total business revenue.
- If you are a lender, the business loan borrowed by you will be considered as a kind of funding and not an income. Therefore, you won't be able to avail of tax deductions on your loan.
- The repayment amount that is being paid in the form of EMI is not tax-deductible.
- Always consider your business requirements and then apply for a suitable business loan that caters to your needs.
- Research and comparison of different financial institutions or banks must ensure suitable loan availability at an affordable rate of interest.
Institutions that offer Loans
An individual can borrow a loan amount suitable to his/her needs and requirements from various financial institutions like Public Sector Banks, Private Sector Banks, Small Finance Banks, Non-Banking Financial Companies, Micro Finance Institutions, and Regional Rural Banks. Generally, these institutions offer business loans to entrepreneurs, self-employed local or small businessmen, MSMEs, SMEs, and professionals who fulfil their respective eligibility criteria. Thoroughly research their rules and regulations and act upon it to borrow business loans at a suitable rate of interest. Also, check whether you can avail of tax benefits on business loans given by your lender.
If you are interested in applying for a business loan and enjoy the benefits of tax exemptions, then you can visit Lending kart. Lending kart is a leading NBFC that provides an online platform for people to apply for loans or other finance forms.
Business loans are a boon for people who are trying to expand or fulfil other business-related expenses for the betterment of their venture. Be it the purchase of raw materials, meeting capital requirements, completing hiring procedures, renting business spaces, paying salaries, management of cash flow, inventory purchase, etc., business loans are a perfect way to take care of it all. Choose a suitable business loan lender for you and reduce your worry and grow your venture into a success. Moreover, for any related queries, you have the service of LendingKart ever ready to serve you!
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