Know The Tax benefits On Business Loans In India

As an entrepreneur, you must understand that Business Loans are indispensable to running a business. You might require a Business Loan for multiple reasons, depending on the type of your business and your funding requirement. You can apply for a Business Loan online and use the borrowed amount to fund your business growth and expansion. You may also revamp old equipment, upgrade the plant, hire new employees, invest in marketing, restructure debt, purchase inventory or raw materials, manage cash flow, or build working capital using the loan amount. Still, some SME owners are sceptical about borrowing because they don’t know about the tax benefits a Business Loan brings to them.

In whatever way you use the loan funds, you can enjoy Business Loan tax benefits to lower your tax liabilities. The Indian tax authorities provide several tax benefits to Business Loan borrowers, as discussed below.

Is a Business Loan Tax-Deductible In India?

The Business Loan amount is not tax-deductible under the Income Tax Act 1961. However, you pay the Business Loan interest rate from your profits, which is eligible for a tax deduction. Each EMI you pay for the loan repayment has a specific component of both the principal and the interest amounts. Each EMI’s interest component is tax-deductible, which eventually reduces your tax liability. Let’s dive into the details.

●       Interest Paid on a Business Loan is Tax-Deductible

The amount you pay back to the loan provider in the form of a Business Loan interest rate is tax-deductible, and you can write it off as a payment made from your business profits. The business expenditure that generates income from the business is known as a business expense, and you can deduct it from your total revenue while calculating the taxable amount. In short, you can arrive at your taxable amount by subtracting the paid interest from your business expenditure. Therefore, it is a great medium to lower your tax liabilities and use the saved funds for business expansion or improvement.

●       The Principal Amount on a Business Loan is Not Tax-Deductible

The principal loan amount you borrow from a lending institution is not tax-deductible. That means you cannot deduct it as a part of your business expenditure. The total amount you borrow in the form of a loan is called the principal amount, and you don’t need to pay any taxes on it. Since it constitutes a part of your gross income, the tax is payable only on your net business income. Principal repayment does not fall under the category of business expenditures since you are just paying back what you borrowed. So, it is not tax-deductible.

Types of Business Owners Eligible for Business Loan Tax Benefits

Various types of business owners can apply for Business Loans and obtain tax benefits, including retailers, sole proprietorships, traders, closely-held or private limited companies, partnership companies, and self-employed professionals like doctors and CAs. Chartered accountants, architects, doctors, business secretaries, designers, etc., are self-employed professionals. Traders and manufacturers are self-employed non-professionals. All these business owners are eligible for Business Loans and can obtain the applicable tax benefits.

Understanding Tax-Deductible Business Expenses

While the Business Loan interest rate is tax-deductible and the principal amount is not, you may need clarification about which business expenses are eligible for tax deductions and what not. Well, you have to incur several expenses to operate a business and maintain it on a daily basis. These expenses are termed business expenses. Expenditures you make to increase your business income also fall under the category of business expenses.

However, not all expenses are revenue-generating. Here is a list of expenses that generate revenue and are tax-deductible:

• Expenditures made to pay salaries and wages of employees and staff members
• Rent payment for office premise
• Expenses made for a location lease out
• Office supplies like stationery
• Daily office maintenance costs
• Business and premise insurance
• Meals, gifts, and entertainment costs
• Employee bonus payments

Important Points to Know About Business Loan Tax Benefits

Some important points to know about Business Loan tax benefits are:

• The Business Loan interest rate is tax-deductible as it is a part of the expenditure.
• The principal amount you borrowed is your gross income and does not form the taxable income.
• Whether you apply for a Business Loan as a term loan, microloan, bill discounting, working capital loan, or letter of credit, the interest paid on the borrowed amount is tax-deductible.
• If you borrow a loan to invest in another business, the interest portion is tax-deductible only if you run it actively. If you use the loan only for investment purposes, the interest amount will not be tax-deductible.
• If you refinance your existing Business Loan to repay it, it is not a business expense, and the interest payment is not eligible for a tax deduction. However, you can claim a tax deduction for interest on the second loan.
• The interest paid on a loan is a part of your business expenditure for the current financial year. You can claim tax benefits during the same year.

Other Benefits of Borrowing a Business Loan

SME loans are collateral-free Business Loans you can use to cover various business-related expenses. You can use the loan amount for any purpose, be it to hire staff, pay wages, cover utility bills, invest in marketing, purchase or upgrade equipment, restock inventory, etc. However, applying for a Business Loan has several other benefits other than the tax exemptions, including the following:

• No collateral requirement
• No profit sharing
• Complete freedom to run your business your way
• Flexible repayment terms
• Competitive interest rates
• Easy online availability
• Minimal documentation requirements
• No end-use restrictions

Thanks to the latest technology and digital platforms, applying for a Business Loan today has become extremely easy and fast. Several lending institutions and NBFCs make financing readily available these days and help you expand your firm to reach new heights. Knowing these Business Loan tax benefits can maximise your savings and help you achieve your goals without liquidating your assets or causing a financial crunch.

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