Does Business Loan Come with Tax Benefits?
Capital is the lifeblood of every business and one of the prominent sources of capital to expand operations, promote business, or purchase new inventory is availing a business loan. It comes very handy when you are starting or are looking to invest additional working capital in expanding operations, hiring staff or getting your hands on new equipment or technology. To grow, every business demands funds and sometimes these funds are not readily available with the entrepreneurs. Taking a loan comes with a huge commitment, but it also comes with a good set of tax benefits since you can write off the interest payments as business expenses.
All You Need to Know About Tax Benefits on a Business Loan
- The loan interest amount is tax exempted
- The principal loan amount is not tax-deductible and does not offer any tax benefit
- The interest paid on a loan is usually deducted from the gross income
- A personal loan taken for business purposes is also tax-deductible
- Helps in the reduction of total tax amount to be paid
- Tax liability is calculated by subtracting business expenses from total business revenue
- To avail the deduction on interest, you need to fulfil some basic criteria defined by the lender
- A loan borrowed by the lender is a type of funding and not your income, so it is not tax-deductible
- Repayment amount that is a form of EMI is not tax-deductible
Tax Benefits Given By The Tax Authorities of India
#1: Interest Paid on Business Loan
The amount paid back to the lender in the form of interest is tax-deductible. Besides, the business expenses that are used to grow the business are also tax-deductible. In reality, borrowers can benefit from a loan as they can deduct the interest amount from the business expenditure to arrive at the taxable amount.
#2: Business Expenses
Business expenses that are incurred to run and maintain operations can also be subtracted from the overall business revenue to arrive at the taxable income. However, these do not come under tax deductions.
- Wages paid to the employee
- Office rental cost of the office premises
- Office supplies such as stationery
- Expenses incurred on the insurance of business
- Advertising and marketing expenses
- Bonus paid to the employees
Is the Principal Amount Tax Deductible?
No, only the interest paid on a loan is a tax-deductible expense on behalf of the business. Since it is an additional amount paid by you to the lender and will be paid out of your income or profits, it is eligible for a tax benefit whereas the principal, on the other hand, is the money you owe to the lender. Hence, it is not deductible from the taxable income.
Conclusion
In today’s banking and financial market, there are several private and public sector banks, Non-Banking Financial Companies (NBFCs), Small Finance Banks (SFBs), Micro Finance Institutions (MFIs) and Regional Rural Banks (RRBs) offering loans for individuals, self-employed, professionals, MSMEs and SMEs. However, these entities still have to meet some eligibility criteria to avail deduction on interest. Before applying for any type of loan, you should always assess your business requirements as per the demand of the situation. Tax benefits can be enjoyed by business owners availing loans and definitely; business loans are tax-deductible.