Tax Benefits on Business Loans in India

Tax Benefits on Business Loans in India

While the idea of a 'Business Loan’ might not seem very friendly in the beginning, you can’t deny the dynamic potential that it may add to a business. Yes, it is true that with great power comes great responsibility. However, with great business loans, comes great benefits as well! We have curated a list of tax benefits on business loans for you, so your decision of applying for a business loan, doesn’t seem as stressful!

The principal amount is non tax-deductible

Principal amount is the main amount required by you for the loan. In simpler terms, it is the true amount borrowed, on which, interest is levied upon later. If you’re worried that borrowing a large principal amount for your business loan, could also be an added burden on income tax, then ease yourself because your business loan’s principal amount is non tax-deductible! This means that you do not have to pay tax on the principal amount. However, this is different for the interest paid on the principal amount of a business loan. To know about how to turn this into a benefit in its own, read on.

The interest paid, is tax-deductible

While your principal amount is away from the burden of tax, the interest paid on it, is not, because the interest paid on a business loan is tax-deductible. However, you can easily write off the interest paid, as business expenditure or a part of it! Let’s understand business expenditure better. Business expenditure is the type of expense which is incurred to generate income. The various types of business expenses are later deducted from the total revenue to calculate the actual tax amount.

A quick way to understand this is through the form of a formula:

Business Expenditure - Total Revenue = Tax Amount

Hence, when you include the interest on business loans as part of such expenses, it may help you in gaining a tax exemption. However, do make sure that you consult a financier or a Chartered Accountant for better guidance related to this.

So what about business refinancing?

When refinancing offers a lower interest rate or a more efficient repayment tenure, it may seem as the best option. This is because refinancing your business can help you retain money in the longer term. However, you need to keep in mind that if you apply for a second loan to pay back the first lender, then it won’t be included in business expense. Additionally, the interest being paid for the first loan won’t be tax-deductible, but the same for the second loan, with be tax-deductible and the rest of the tax benefits will follow on the second loan, not the first one.

Tax-deductible interest on equipment and machinery loan

The interest being paid towards an equipment and machinery loan, which is availed to uplift a business, is tax-deductible and hence, it can be included in business expenses to reduce the burden of paying back the loan.

Some additional points to keep in mind while applying for a business loan are:

1. Any business loan borrowed by an individual doesn’t fall under ‘income’. Hence, it shouldn’t be a part of taxable income.
2. Gross income includes the principal amount and hence, isn’t considered as a part of taxable income.
3. When the business loan payment is in EMIs, only the interest paid is tax deductible and not the whole EMI.
4. When personal loan is availed for businesses, it is also tax deductible.
5. Tax deduction is only true for the interest that is paid on EMIs.

While this may provide you a basic understanding of what all follows after you avail a business loan, especially in the form of tax benefit. We hope you make a fair decision for you and your business!

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