Loans

The following are the critical components of a loan-

• Principal: This represents the initial sum that was borrowed.
• Term: The time frame for loan repayment for the borrower.
• Rate of Interest: The Annual Percentage Rate, which is typically used to describe the pace of rise in the amount owing.
• Loan Repayment: The sum of money required to be paid each week or month in order to fulfil the loan's conditions. This may be calculated considering the principal, loan period, and interest rate.

The following are the main types of loans-

A Personal Loan is an unsecured lending product offered by financial institutions based on factors including job history, ability to repay, income level, profession, and credit history.

A Personal Loan can be used for a variety of things, such as paying off old debt, going on vacation, providing a down payment for a home or automobile, covering an unexpected medical expense, or getting expensive furnishings or technology.

A Home Loan is money an individual borrows from a financial organization to build a home, modify an existing one, or expand it. The funds are borrowed at a predetermined interest rate and returned in EMIs, or equal monthly installments, within a specified time frame.

A Car Loan is the sum of money given to a person, business, or other organization to purchase an automobile. The entity receiving the loan is known as the borrower, while the lending authority is known as the lender.

When taking out a loan, the borrower agrees to pay back the whole loan balance, plus interest, by a specific date using EMIs.

A Gold Loan or loan against gold is a secured loan accepted by borrowers seeking to meet their immediate or long-term monetary demands.

In such loans, the borrower guarantees their gold jewelry as security. According to the Reserve Bank of India, the loan amount allowed may not exceed 90% of the gold's current market value. The gold that can be pledged ranges in carat weight from 22 to 24.

A financial loan taken out to cover costs associated with higher education or postsecondary education is known as an Education Loan.

Education loans are designed to pay for living expenses while the borrower is pursuing a degree, as well as tuition, books, and supplies. To obtain the finance, you must have the entry permit issued by the organization. The funding is offered for both domestic and foreign courses.

The amount a lender charges a borrower is called an interest rate expressed as a percentage of the principal or the lent amount. Typically, a loan's interest rate is defined as an Annual Percentage Rate or APR.

Further, listed below are the interest rates on various loans from various financial and banking institutes-

As a popular method of obtaining ready finances, loans stand out. The majority of loans obtained in India are need-based and are used for things like starting a business, buying a new home, paying for a child's education, getting a new automobile, etc.

Additionally, various loans qualify for different tax benefits. These may include Personal Loans, Home Loans, Car Loans, and Education Loans amongst various others.

The following list includes the tax benefits on different types of loans-

Although Personal Loans are not taxable, they may qualify for tax deductions if the money is used for a particular purpose.

•   Investment in Business Growth

The interest paid on a personal loan used for commercial purposes may be deducted from income. The taxpayer can thus lower both their tax obligation and the business's net taxable earnings. Additionally, there is no limit on how much a person may claim in this situation.

•   Home Renovation or Improvement

If a person uses a personal loan to finance the acquisition or building of a residential property, they may be eligible for tax benefits. Under Section 24 of the Income Tax Act, interest repayment may be deducted.

For a self-occupied borrower, the maximum amount for tax deductions is ₹2,00,000. Furthermore, if the residence is rented out, there is no restriction on the maximum amount that can be claimed.

•   Acquisition of Assets

When taxpayers utilize this loan amount to buy items like jewelry, shares, non-residential property, certain stocks, and the like, they are eligible for tax deductions. Taxpayers are not permitted to make deductions in the same year that interest is paid. It does, however, increase the cost of purchase. Therefore, one may claim a tax gain in the year this asset is sold.

With the goal of providing "housing for all by 2022," the Indian government began the Pradhan Mantri Awas Yojana (PMAY) on June 1st, 2015. However, both the government and the general populace find it difficult to carry out this slogan due to the soaring real estate prices. A Home Loan can be used as a resource, but it also carries one of the largest credit responsibilities.

Home Loans entail significant amounts, a long repayment period, and large monthly payments. Therefore, the Income Tax Act provides a sizable Home Loan tax benefit, which encourages people to use this advance.

A residential property loan obtained from any Indian financial institution is eligible for income tax advantages under Section 80EE.

To be eligible for an 80EE deduction, a person must fulfill the following requirements-

• On the day a house loan is sanctioned, he or she cannot be the owner of any other residential property.
• The property should be worth no more than ₹50,00,000.
• A loan taken out to pay for the acquisition of a property must be for no more than ₹35,00,000.

A financial institution or a housing financing firm must approve this mortgage. The government expanded the house loan tax advantage in 2019 by introducing a new Section 80 EEA.

For house loans up to ₹1,50,000, interest payments are deductible under Section 80 EEA. In addition to the ₹2,00,000 deductions allowed under Section 24 for interest payments, this deduction is also available. As a consequence, taxpayers are now able to deduct interest on house loans up to a total of ₹3,50,000.

Since cars fall under the category of luxury goods, no tax advantages are given for a loan used to finance the purchase of a car. However, a car loan counts as a business loan when a vehicle is used for professional reasons. Therefore, under Section 80C of the Income Tax Act, this loan is eligible for a tax deduction.

The government has worked hard throughout the years to support higher education in the nation through a variety of projects and programs. Education loans now qualify for a longer tax break under Section 80E of the Income Tax Act, making them more widely available.

It offers the following advantages:

• There is a tax deduction available for interest paid on student loan payments.
• It can be utilized starting in the year that a person begins paying back loan interest.
• The maximum time frame for filing for this deduction is up to 8 years from the start of interest payments, or until all interest is paid, whichever comes first.
• There is no maximum cap on the size of this deduction.
• It is only provided if a financial institution or other approved entity approves a student loan.

Only if the education loan is used for higher education is this deduction permitted. Here, the term "higher education" refers to programs pursued after passing the Senior Secondary Exam (SSE). 

The gold loan does not have any tax benefits unless one use the loan amount for home improvements, the purchase/construction of a residential property.

Regarding home improvement, one can claim a deduction under section 80C. Note this deduction is primarily for the principal sum and is capped at Rs. 1,50,000/- per year.

Also, if the loan amount is utilized for the purpose of construction or purchase of a residential property, a deduction of up to Rs. 2,00,000 in a year can be claimed under section 24.