What Are The Tax Benefits Of Taking A Business Loan In India?

A business loan is one of the best ways of meeting an urgent cash requirement for an enterprise, for which the business itself or the promoters may not have money readily available at hand.

Money from a business loan can be used for any business purpose—expansion, working capital requirements, paying wages and hiring more people, buying raw materials and inventory, for cash flow management, consolidating debt or paying rent, etc.

A business loan can be availed by all manner of enterprises including micro, small and medium enterprises (MSMEs), and others like artisans, traders, manufacturers, retailers, private and public limited companies, sole proprietorships, partnership firms and limited liability partnerships.

But Can A Business Loan Help An Entrepreneur Save Tax?

Absolutely. The interest paid on a business loan is tax deductible. An entrepreneur taking out a business loan can subtract the interest paid on the loan from their annual income.

According to the Income Tax Act of 1961, anyone taking out a business loan can avail a deduction in lieu of interest paid out of the profits of the business for which the loan is being taken. The act also specifies that the money that a business gets as loan is not the same as profit, revenue or income from that business.

Interest on a business loan is tax deductible as it is the extra money paid over and above the principal amount, by a borrower to the lender to avail the loan.

Typically, any expense that goes towards generating more income for the business is tax deductible.

However, the principal amount is not tax deductible as it is not an expense. Having said that, a business is not required to pay any tax on the principal amount as it is not treated as business income. Tax is paid on the net income earned during the financial year.

Key Tax Benefits Of A Business Loan

• The interest on a business loan is tax exempt
• The principal is not tax exempt but is not considered business income
• Any personal loan availed for business purposes is also tax deductible
• Tax deduction effectively reduces the total tax liability of the business owner
• The tax deduction can be availed as long as the borrower can fulfill some basic criteria defined by the lender
• The principal amount is considered funding for the business and is, therefore, not tax deductible
• Repayment in the form of equated monthly installments or EMIs is not tax deductible

Conclusion

A business loan can be more than just a means of furthering the growth of a business. It can help an entrepreneur save some money on the tax outgo of the business.

As a business owner you may want to survey the entire loan market to get the best possible interest rates and other loan terms, so that you can avail the maximum possible tax exemption on the interest payable on the loan.