Does Your Business Loan Get Tax Benefits ?

 

Business loans are required at various stages of business activities like expansions, purchase of working capital, equipment etc., so as to maintain consistent cash flow for ensuring smooth business operations. Business loans carry an interest charge which is deductible as an expense from your gross income. 

Are business loans tax-deductible in India? 

Yes, business loans are tax-deductible in India. As per the provisions of the Income Tax Act, 1961 the interest component of the business loan is eligible to be deducted from profits earned in your business. The Income Tax Act further clarifies that business loans availed are not income from the business, through which the business earns profits. 

Tax Benefits under Business Loan

⦁ Interest charge on business loan - Business loan entails an interest charge which has to be paid back to the lender as part of the monthly instalment. The interest component of the business loan is eligible for a tax deduction as a form of an expense in the business income statement. The deduction lowers the overall business tax liability. The amount paid back to the lender in the form of interest is tax-deductible. Many businesses like those in the Micro, Small and Medium Enterprises (MSMEs) category can thus avail business loans as an apt method for business expansion and lowering tax liability. The principal amount availed from the lender is, however, not tax-deductible.

⦁ Business expenses - Business loan availed can be utilized to meet the day-to-day business expenses for ensuring the smooth running of business operations.  Business expenses like wages, office rent, stationery, advertising, bonus, etc. are key business expenses which have to normally be borne by businesses. Such expenses are deducted from the revenue earned to arrive at the net taxable income. 

Tax Benefit on Business Loans - Key Points 

⦁ A business loan can be of various types like a term loan, working capital loan, bill discounting, small business loan, letter of credit, etc. 

⦁ Interest charge on all types of business loan is tax-deductible.

⦁ Interest charge on personal loans taken for business is also eligible for a tax deduction.

⦁ Interest on the business loan is normally subtracted from the gross business income. 

⦁ Claiming interest on a business loan reduces your total tax liability.

⦁ Tax liability is calculated by deducting total business revenue from total business expenses.

⦁ The principal component of the business loan is not a business expense and is not tax-deductible.

⦁ The principal amount of a business loan does not offer any type of tax benefit

⦁ Repayment component of the loan amount in the form of an equated monthly instalment is not eligible for a tax deduction.