Tax Benefits On Business Loan In India

The availability of tailor-made financing options for businesses has changed the way companies structure their investments. It has presented them with an avenue to source necessary funding without worrying about collateral or facing dragged-out processes. Moreover, the lack of usage restrictions has allowed entrepreneurs to manage any expense with ease.

Owing to its customer-friendly benefits, the business loan segment has registered a growth of 13.8% from March to September 2020. The outstanding balance in this segment rose to Rs. 1.2 lakh crore in September compared to Rs. 1.05 lakh in March 2020, per the same report.

• According to the Income Tax Act of 1961, business loans are tax deductible.

Alongside other perks, the tax exemption-feature of business loans has fuelled its popularity among entrepreneurs significantly. 

Read on to know more about the income tax benefits of business loans.

Tax Benefits On Business Loans In India

Along with meeting a company’s financial needs, a business loan also facilitates tax exemptions. Here are the heads to be aware of in that respect –

Interest Paid On Business Credit Is Deductible

The interest borne on a loan is exempted from tax calculation if entered into the books as an item of business expenditure. Since expenses like these are considered necessary to generate revenue, they are deducted from the total income, after which one arrives at the taxable amount. It is an excellent way for entrepreneurs to reduce their tax liability.

The Principal Amount Is Not Tax-Deductible

The principal component doesn’t add to or reduce a business’s tax obligation. It’s because you cannot deduct this sum from the gross income, unlike interest payment. On the other hand, it’s also not earnings you can add to the gross income. Thus, the borrowed sum has zero impact on a business’s tax liability. 

Apart from these, here are a few additional pointers regarding income tax exemption on loan for business –

• Any form of business loan, be it for working capital or equipment financing, enjoys the aforesaid provision.

• Personal loans used for business purposes also come under this exemption.
• Lastly, if the repayment is in EMIs, only the interest portion of the instalments will qualify for a deduction.

By being aware of the tax benefits of a business loan, entrepreneurs can save substantially on their yearly obligations. Apart from this, they can also keep in mind other aspects of this financial product to maximise their benefits.

Benefits Of A Traditional Credit For Business

Here are some notable features of a business loan to be mindful of –

1.Collateral-free

Financial institutions typically extend business loans without collateral. Thus, enterprises just starting out or without substantial assets to their name can obtain financing easily.

2.Funds At Attractive Rates

The attractive interest rates offered by NBFCs on business loans also works in favour of entrepreneurs. It reduces the total cost of borrowing and makes repayment more affordable.

3.Multi-faceted Product

This financing option is specifically designed for businesses but comes with no usage restriction. Borrowers can cover an array of costs, starting from financing inventory purchase to renovating an office space.

4.Faster Disbursal Of Funds

Loans for businesses involve minimal documentation and get approved and disbursed quickly. Moreover, the introduction of online applications has fast-tracked this process even further. 

A prime example of this is an app like MANDII. It presents an exciting opportunity for individuals to find suitable financiers and loan offers. Once borrowers upload their documents on the app, it will show a few options based on that information. Also, from application to disbursement, the entire process is completed on the app, improving borrowers’ convenience. 

Single-window systems like these are gaining traction because they help individuals bypass the hassle of searching for a lender, negotiate with multiple representatives, or perform various formalities.

Bottom Line

The advantages of a business loan make it a popular credit instrument among companies of every scale. Income tax benefits are a ‘cherry on the top’. Knowing the nitty-gritty of tax exemption on business loans aids entrepreneurs to thin out their cash outflow while conveniently financing various purposes across the board.