Tax benefits can be availed if a business owner has availed a business loan for investment, growth, or any other business purpose. There are several tax benefits offered by the Indian government on business loans. In this blog, we shall discuss the tax benefits and exemptions on loan for the business.
A business loan is availed for the benefit and growth aspects of the business. However, they are said to be a great liability on the borrower. And they have a repayment tenure which is a regular expense for the business owner. And so, there are income tax benefits to the business owner.
According to the Income Tax Act, 1961, a borrower can avail different types of tax benefits if he is repaying a loan. Availing a business loan is solely dependent on the business owner’s requirements. So, they cannot choose between different types of business loans (flexi loan, SME loan, MSME loan, and machinery loan) depending on the tax benefits they offer.
Having said that, a business owner can certainly use the loan amount to cut the income tax amount he pays every year to the government.
What are the Benefits of Business Loans?
A business owner enjoys several benefits when they avail a business loan. The availed money can be used for different purposes, such as increasing inventory, working capital, machinery, equipment, etc. In addition, borrowers have the flexibility to repay the loan as per their cash flow with flexible repayment tenures offered by NBFCs. And there are tax deductions on loans for business since the interest paid to repay them are termed as expenses. So, if you ask Is A Business Loan Tax Deductible, then the answer is YES.
Tax Benefits under Business Loan
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A business loan in India comes with interest charges. And business loan interest rates are termed as an expense which is required to be paid by the borrower for borrowing the money from lender. Notably, the interest charges are the fees to be paid for borrowing money from the lender for the business. There are tax benefits on the interest costs.
What are the Tax-Deductible Expenses?
The tax is paid on the net income earned by a businessman in a financial year. There are some ordinary and necessary expenses which are subtracted from the gross income to calculate net income. Significantly, the income tax is paid on net income and not on gross income. So, all the expenses are subtracted from the gross income to calculate net income and thereafter income tax to be paid. It is important to carefully deduct all the expenses to lower down the net income and income tax amount.
One such important expense is EMIs paid on the business loan. However, it is important to know the interest rates, processing fees, and other terms and conditions before applying and availing the loan for the business. This will help in knowing the tax benefit a business owner will get from the loan for the business. A business owner can also opt to refinance his loan.
Is the Business Loan Interest Tax Deductible?
Yes, the interest paid on loan for a business is tax deductible. The tax authorities of India allow the business owners get tax benefits on business finance. The interest is paid to the loan lenders for using their funds. This amount is an expense for the business and is deducted from gross income. The business owners are suggested to maintain proper accounts for these types of payments.
In addition, the point that is worth mentioning here is that the principal amount is not tax deductible. The borrowed amount is not an income for the business. It is just the borrowed amount which will be repaid during the tenure agreed between borrower and lender. Simply put, principal repayment is paying back the money availed. So, the borrowed money is not income and repaying the same is not expense. And it is not tax deductible.
A business loan is fairly easy to avail in today’s time of technology and it has many benefits as well. However, one important point here is that it has to be repaid over a period of time. Therefore, the business owner must know his requirements and assess the requirements according to the situation of the business. Also, it is a good idea to avail a business loan if he wants to grow and expand his business.