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Every business requires capital to grow and expand. One of the most common ways to secure finance is a business loan. allow MSMEs to continue running their operations smoothly. You can use a loan to meet the instant cash requirements or for business expansion purposes. Business loans can take care of requirements like purchase of equipment, working capital requirements, procuring raw materials, paying-off rent, hiring new staff, etc. Moreover, a business loan allows you to avail several kinds of tax benefits.

In this article, we discuss the tax benefits of business loans and understand how business loans affect taxes.

Are business loans taxable in India?

Are business loan repayments tax deductible in India? The answer is yes.

According to the provisions of the Income Tax Act, 1961, the interest segment of a business loan is eligible to be deducted from profits earned in your business. The Income Tax Act also clarifies that business loans that you avail are not income from the business, through which you can earn profits.

Before we proceed to how does a business loan affect taxes, let us understand what loan interest is.

Business loan interest refers to the extra amount of money that the borrower must pay to the lender to avail funds. This interest amount is over and above the total borrowed amount or the principal.

The principal amount refers to the total loan amount taken from a bank as the business loan. Since it is not the interest on business loan, or a part of business expense the principal amount is not tax deductible. While you are not required to pay income tax for the principal or borrowed amount, it will be considered a part of your gross income.  It may be noted that net income earned by an entrepreneur in a financial year is the taxable component. Additionally, when you avail a business loan, you can also avail of a tax benefit on the processing fees of loans.

What are the tax benefits of a business loan?

  • Interest charged on business loan: As mentioned above, the interest component of the business loan is eligible for a tax deduction. It is considered as a form of expense in the income statement of the business. This deduction helps lower the overall tax liability. The amount that you pay back to the lending bank or financial institution as interest is tax-deductible. MSMEs can avail business loans for business expansion and for lowering tax liability.
  • Business expenses: On the other hand, a business loan that is availed by an MSME can be utilised for daily operational costs like wages, rent, advertising, etc. These costs are usually borne by the business. These expenses are deducted from the revenue earned to calculate the net taxable income.

Here are the key points to know on the tax benefits of business loans:

  • Interest amount of business loan is tax exempted
  • Principal loan amount is not tax deductible
  • The interest of a loan is deducted from the gross income
  • Personal loan availed for business is also tax deductible
  • Business loans help in reduction of total payable tax amount
  • Tax liability is derived by deducting business expenses from business revenue

What is the eligibility for availing a business loan?

Refer to this eligibility checklist for small business loans if you are seeking to avail one:

    • Minimum age should be 18 years at time of loan application and maximum 65 years at time of loan maturity.
    • Minimum amount of loan can be ₹10,000 and maximum ₹50 Lakh. Depending up on business requirements and applicant’s profile, this amount can be extended up to ₹10 crore
    • Tenure of loan can be from 12 months to 60 months
    • CIBIL/Credit Score of 650 or above is a requisite
    • The loan seeker must be on Indian national with no criminal records
    • Business existence of minimum 2 years form the date of incorporation is a mandate
    • Business experience of minimum 1 year in the same line of occupation is necessary

To sum up: How to avail a business loan?

Capital is necessary for all businesses to ensure financial health. loans are beneficial for growth especially if you are a start-up or new enterprise with limited funds. The interest component of business loans is tax deductible. Therefore, MSMEs can consider applying for a business loan not just to ensure business continuity but also to lower their tax liability.

In case you need assistance to decide and apply for a business loan, you can reach out to Tata nexarc. We have partnered with trusted lenders and offer attractive unsecured loans from leading banks and financial institutions in India to meet your MSME’s financial needs. You do not need to visit multiple banks to find the lowest interest rates, repayment, and EMI options. You can also compare the rates of various lenders and find the right option for your emerging business on the Tata nexarc platform.

Aditi Bhattacharjee

Aditi is a seasoned content writer with 8 years of experience crafting content for the Tech-driven businesses, and helping them in understanding the complexities in Saas-bases business growth. Her informative writing empowers companies to scale the product better and grow in this landscape.