How To Write Off Repayment Of A Business Loan

A business loan is essentially credit—with or without collateral—that an enterprise borrows from a bank or a non-banking finance company (NBFC) to use for a business activity.

Like every loan, a business loan, too, has to be repaid in full, with the due interest and within the stipulated time.

So, are there any tax breaks that a business is entitled to if it has availed of a business loan?

The repayment of the principal amount on a business loan is typically not tax deductible but a borrower can look to write off the interest on the principal amount that has been repaid. Moreover, the money an enterprise borrows as a business loan, will not count as business income. On the flip side, a borrower cannot claim any tax benefit on the principal repayment as they are only paying back the money borrowed.

A borrower can, however, claim income tax deductions on the interest paid on the principal amount, under Section 80C of the Income Tax Act.

Who Can Apply For A Business Loan?

Although the eligibility criteria may vary from lender to lender, any establishment that has been in operation for at least six months can apply for a business loan. The owner must, however, ensure that the business does not fall in an excluded category that may not be eligible for a business loan or may have been blacklisted by the lender.

Moreover, they must ensure that the office premises or a business location are also not blacklisted. The borrower must also keep in mind that charitable organisations, non-governmental organisations and trusts are not eligible for a business loan.

Tax Benefits

Section 80C of the Income Tax Act provides for various income tax deductions that people can claim. These deductions can be up to Rs 1.5 lakh. This can be done either by investing in tax-saving options like the Public Provident Fund, the Employee Provident Fund, the National Pension Scheme and Unit Linked Insurance Plans. This can also be done by claiming a deduction on the interest outgo of a business loan.

Like in the case with every loan that is availed, a business loan too incurs interest on the borrowed amount, which is effectively the cost of borrowing that one has to pay. This interest is paid throughout the tenure of the loan.

Under Section 80C of the Income Tax Act, this interest paid is tax deductible to the tune of Rs 1.5 lakh per year. This can be done by writing the interest payment off as payments made for business purposes while a borrower is filing his or her income tax return.

So, if for instance, one has taken a business loan on which one incurs an interest of Rs 1 lakh, they can claim it as a deduction to effectively lower their taxable income. So, if a person has a taxable income of say Rs 10 lakh, he or she will be taxed only on Rs 9 lakh in this case, provided they do not claim any other deductions.

So, a borrower must always remember that while the principal amount repaid is not considered tax deductible, the interest portion of the monthly business loan repayment is, and can be claimed as a deduction.

Apart from a business loan, the interest paid on any personal loan availed for a business purpose is also deductible under Section 80C.

Conclusion

As is evident from the discussion above, a business loan can actually be a good tax saving tool. While as a borrower you must ensure that the loan is paid back in time and in full, choosing the right lender is also important.

You should ideally approach a well-established lender like IIFL Finance, which has a stellar reputation in the credit market and offers some of the best and most competitive interest rates. The company, one of India’s top NBFCs, offers both unsecured and secured loans to help small and medium enterprises grow their operations.

IIFL Finance has set robust standards and processes in place that the entire process of availing a business loan—from application to approval and from disbursement to repayment—is hassle-free and seamless.