Tax Benefits on Business Loan in India

Every business owner understands the need of a business loan and how indispensable it is. There are multiple reasons why a business loan is required, and that depends upon the need and type of business.  It can be used for the expansion and growth of the business, revamping old machinery, installing and upgrading the plant, hiring new employees, marketing, and promotions of the business, managing cash flow, restructuring the debt, purchasing the raw material, and purchasing the inventory. Some business owners are skeptical about business loans as it requires proper planning and management of funds. Without adequate planning, it can become cumbersome to handle finances and lead to further financial mismanagement.

Availing a business loan comes with a lot of benefits as the business owner can use the funds for various purposes and get a tax benefit on the interest paid to the lender. In whatever way the funds are being used, a borrower can enjoy tax benefits and lower his/her tax liability. The amount paid back to the lender for the business loan availed is known as the interest amount. There are tax benefits provided to the borrower by the tax authorities of India which are discussed below:

Interest Paid on Business Loans are Tax-Deductible

The amount paid back to the lender in the form of interest is tax-deductible and can be written off as the payments made for the business expenditure. The expenses used to generate income from business are known as business expenses and can be deducted from the total revenue to get the taxable amount. In-short, a borrower can deduct the interest amount from the business expenditure to arrive at the taxable amount. It is a great tool for small business owners and entrepreneurs to lower the tax liability and use the funds for expanding the business.

The principal amount availed from the lender is, however, not tax-deductible and cannot be deducted as a part of the business expenditure. The total amount availed in the form of a business loan is known as the principal amount, and there is no requirement to pay tax on the principal amount. It constitutes the part of gross income, and the tax is paid on the net income earned by the business owner.

Tax-deductible Business Expenses

A business requires certain expenses for operation and maintenance, and those expenses can be marked as business expenses that are used for generating income. Such expenses can be subtracted from the overall business revenue to reach out to the taxable income.

The below table shows the types of business expenses that are not constituted in the business revenue.

Important Points for Business Loans

Some of the important points that a business owner should know if he/she has availed a business loan are:

1. The interest paid by the borrower every month on the principal amount is tax-deductible and should be shown as a part of the business expenditure.
2. The principal amount is a part of the gross income and won’t be considered while calculating the taxable income.
3. The business loan availed by the borrower is not a part of the income and hence should not be a part of taxable income.
4. Any business loan, whether term loan, working capital loan, microloan, small business loan, equipment finance, letter of credit, bill discounting, tax benefits, and interest paid on the principal amount, is considered tax-deductible.
5. The personal loan available for a business is also tax-deductible.

If the payment is in the form of EMI, which constitutes the part of the principal amount as well as the interest, then please note that only the interest amount will be tax-deductible, not the whole EMI. One can reach out to the financier to understand the interest component in the equated monthly installments.