Is A Business Loan Considered Income?
Once you’ve secured the capital you need, you may find yourself asking, is my business loan considered income or is it an expense? Read to find out!
Raising external capital is one of the most crucial aspects of running business operations smoothly. Although there are numerous ways to raise funds, entrepreneurs choose a business loan as it provides the most flexible terms and unique features. However, like every other credit product, a business loan also has numerous tax implications.
What Are Business Loans?
A business loan is a credit product offered to business owners who want to raise external funds to cover their business expenses. Most businesses need external funds to cover numerous company expenses such as employee salaries, rent, buying equipment, or expanding the business in other cities.
Lenders analyze the eligibility and creditworthiness of the business and the owner to offer them a loan with interest. After taking a business loan, entrepreneurs or business owners must repay the principal business loan amount with interest to the lender within the loan tenure.
Why Is A Business Loan Amount Considered Income?
Every Indian entity, an individual or a business, must legally pay income tax or other applicable taxes on the overall income. Suppose you have five sources of income, such as income from house property, salary, investments, etc. In this case, the Indian government clubs all the earnings to determine your total taxable income.
The various income tax slabs created by the Indian government analyze the overall taxable income charged based on the applicable tax slab. However, when entrepreneurs take any business loan, such as a startup business loan, MSME business loan, or small business loan, the lenders credit the entire business loan amount into the bank account of the company or the entrepreneurs.
Although the entrepreneurs can only use the business loan amount for business purposes, the bank account shows a credit of funds. If entrepreneurs consider it as income, the amount would include the overall taxable income of the entrepreneur.
Is A Business Loan Considered Income?
When you take any business loan, such as a startup business loan, MSME business loan, or small business loan, you get the loan amount into your bank accounts. However, as the amount is a loan, it is not considered income by the authorities. Hence, there is no need for you to add the loan amount received in the bank account to the overall taxable income.
The Indian government specified that any loan in the lender’s or business balance sheet is not considered personal or business income of the borrower. Since entrepreneurs can only use the loan amount for business purposes, and the borrower is legally bound to repay the principal amount, paying taxes on such an amount is of no use to the Indian government.
Business Loan Amount As Income: The Exception
In most cases, the business loan amount is not considered taxable income. However, the lender may forgive your loan or an outstanding amount because of some professional or personal reasons. In such a case, you are not legally liable to repay the loan to the lender, which makes you free to use the business loan amount for other personal or business purposes.
Since there is no obligation to repay, the amount is considered income and added to the overall taxable income. Such forgiveness of the business loan amount by the lender binds the recipient to pay tax on the forgiven amount as it is considered income.
Interest Payments As A Business Expense
One of the best features of different types of business loans, like a startup business loan, MSME business loan, or small business loan, is the deduction of interest payments as a business expense.
Business loans create a repayment framework where borrowers have to repay the loan amount through monthly EMIs, which include interest payments. You can claim the interest payments as a business expense at the time of repayment, effectively lowering the overall taxable income. However, you can only deduct the interest for the loan amount you have utilised and spent.
Avail Of An Ideal Business Loan From IIFL Finance
IIFL Finance offers various financial services, including customised and comprehensive business loans. Through IIFL Finance business loan, you can get instant funds up to Rs 30 lakh with a quick disbursal process online and minimal paperwork. The loan’s interest rate is attractive and affordable to ensure repayment doesn’t create a financial burden. You can apply for the loan online or offline by visiting IIFL Finance nearest branch and verifying your KYC details.
Q.1: Do I have to pay taxes on the availed business loan amount?
Ans: No, as loans are not income, you do not have to pay taxes on the availed business loan amount. However, if the lender forgives the loan, you are liable to pay taxes on the amount.
Q.2: Do I need collateral to acquire a business loan from IIFL Finance?
Ans: No, IIFL Finance business loan does not require pledging any asset as collateral to take the business loan.
Q.3: What are the benefits of IIFL Finance business loan?
Ans: The benefits of an IIFL Finance business loan include:
• Instant loan amount up to Rs 30 lakh
• An easy and online application process
• Instant credit of loan amount to your bank account.
• Affordable EMI repayment options