Tax Benefits of Business Loans in India: A Comprehensive Guide

Entrepreneurs and business owners understand the vitality of feasible capital flow. Maintaining the right balance of working capital and debt capital helps a business continue its daily activities and secure long-term plans. The capital need is vast, but the resources to fulfil this need are limited. One such potential avenue for capital accumulation is a Business Loan.

Business loans are one of the most trusted outlets for businesses to increase their capital pool. You can buy machinery or raw materials, pay salary or rent, invest in technology upgradation, and much more through the loan amount.

But do business loans offer tax benefits? Yes, they do. If you take a business loan in India, you are eligible for multiple tax benefits. This article highlights the primary tax advantage of taking a loan for business in India.

Essential Tax Benefits Of Taking A Business Loan In India

Tax deduction helps reduce your tax liability by reducing taxable income. Tax-deductible expenses involve costs that help to generate income for the firm. For example, in India, you can seek a deduction on the interest paid on business loans. The interest paid on business loans qualifies as a business expense and is eligible for deduction.

It reduces the tax burden on small and medium enterprises and allows them to utilise the funds for their operational growth. However, the principal borrowed from the lender is not tax deductible under the statute.

Points To Remember When Accounting For Business Loans

• Your monthly EMI payments include an interest amount and principal sum. However, only the interest is tax deductible and categorised as a business expense.
• The principal loan amount is a part of the gross income, so it is not eligible for the computation of the total income.
• Your total income does not include the business loan, so the latter does not qualify as a part of taxable income.
• Long-term loans, working capital loans, microloans, equipment finance, LOCs, bill discounting, interest on the principal loan amount, and others, are eligible for tax deductions. Also, personal loans available for businesses are allowed as tax deductions.

Bottom Line

Business loans are one of the best options for companies to cater to their capital requirements. They are secure, feasible, and easily accessible financial tools that offer swift cash flow to firms struggling with financial crunches. Additionally, the Indian tax system offers several perks to business entities through deductions. These deductions can help reduce the overall tax liability if you take a business loan. Businesses can expand their savings pool and enhance their work efficiency with reduced tax liability.

FAQs:

Q1. What is business loan interest?
Ans. Financial institutions charge an interest fee on the business loan amount taken to fuel business operations. The funds help owners in managing routine activities and plan future expansion.

Q2. Is the purpose of a business loan a determining factor for tax calculations?
Ans. Yes, the purpose of the business loan is essential for tax calculation. For instance, you utilise the loan amount to buy a new business. Now, the interest on the loan will be tax-deductible only if the new business increases the efficiency of the original enterprise.