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One of the tax deductibles a business can claim during the annual tax filing is the one for business loan repayments. According to the Income Tax Act, 1961, the interest on a business loan is tax deductible. This helps businesses not only to take advantage of the funding but also avail tax benefits on loans, lowering their tax burden.
What is the meaning of tax deductible?
Tax deductible is an expense incurred in the assessment year that can be deducted from your total tax. Tax deductible is a tax benefit provided by the government to encourage an activity like registering your employees for EPF.
Examples of tax deductibles for businesses include insurance taken for premises, revenue expenditure on scientific research pertaining to the business, setting up and operating a warehousing facility for storage of agricultural produce, etc.
Is interest paid on business loan tax free?
Business loans are usually taken for handling business expenses like working capital or upgrading existing technology. Repayment of these loans happens in installments paid monthly or for a time period according to the loan agreement. Each repayment includes a principal and interest amount.
This is what Section 43B of Income Tax Act has to say about tax benefits for business loans in India:
- Interest on loan/borrowing from any public financial institution, State Financial Corporation or State Industrial Investment Corporation is deductible.
- Interest payments to scheduled banks/Co-operative banks (other than a primary agricultural and development bank)/primary co-operative agricultural and rural development bank on loans or advances is deductible.
- Interest on loan or borrowings from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company is deductible.
The above three statements mean that interest paid on loans borrowed from financial institutions can be deducted from your gross tax amount. Whatever the business loan interest rate may be, it is fully deductible from your total tax payable.
To understand this better let us look at an example:
Net income = ₹50,00,000
Corporate tax rate = 25%
Tax payable on gross income = ₹50,00,000 x 25% = ₹12,50,000
Total tax = ₹12,50,000
Interest paid on business loan = ₹2,00,000
Insurance on premises = ₹3,50,000
Capital expenditure incurred during on scientific research = ₹1,63,000
Net tax = ₹12,50,000 – [₹2,00,000 + ₹3,50,000 + ₹1,63,000]
Key points to keep in mind for business loan tax benefits
- Interest paid is tax deductible.
- The principal amount of the business loan is taxed.
- The EMI repayments also have separate tax charges that have to be borne by the taxpayer.
- Personal loans taken for business purposes are also tax deductible.
- Business loan deduction helps reduce the net tax amount.
Are tax benefits extended to all types of business loans?
Interest paid on the principal amount on any type of business loan is considered tax-deductible. Here are some of the common types of business loans in India:
- Term loan
- Working capital loan
- Equipment finance
- MSME loan
- Micro loan
- Letter of credit
- Machinery loan
- Startup loan
How to get business loans in India?
Business loans can be obtained from any of the financial institutions. NBFCs, MFIs, banks and co-operative banks are the common sources of financing for businesses. Every financial institution will have a website where they have mentioned all their business loans products. Study various loan products available and compare interest rates and other terms and conditions. This will help you pin down the business loan you want to apply for.
There are also new age fintech platforms that give online loans to businesses within a very short time frame. For instance, Business Loans on Tata nexarc can give you a loan offer in 5 minutes once you submit the required documents. The process is online, documents required are minimum and eligible businesses can avail loans up to ₹30 lakh.
Business loans by Indian government
Another way to find a business loan suitable for your business is by searching for business loans by the Indian government. These loans are released as a part of government schemes introduced to improve access to credit for businesses. There are several government schemes that businesses can leverage for funding:
- Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFMSE)
This scheme gives access to term loans and working capital loans of up to ₹2 crores for MSMEs. It offers a guarantee cover of up to 75% for loans up to ₹1.5 Crore, 85% for loans up to ₹5 lakhs and 80% for women-led entrepreneurship and MSMEs from Sikkim & North-East India. MSMEs involved in the services and manufacturing sector, educational and training institutions, and self-help groups are eligible for this scheme.
- MSME loan in 59 minutes
As the name suggests, this is a loan designed for quick disbursal. The government has launched a simple and intuitive online portal for the MSME loan for high-speed processing with minimal documentation. This portal automates the entire loan approval process with human interaction occurring only at the loan approval stage. This is a collateral free loan with the loan amount ranging from ₹1 lakh to ₹5 lakh.
- Credit Link Capital Subsidy Scheme for Technology Upgradation
This is a subsidy scheme that enables businesses to buy and upgrade existing equipment and acquire new technologies at discounted prices. Companies can get subsidies up to 15 % on capital purchases. The maximum subsidy amount is capped at ₹15 lakhs. Sole proprietorships and private and public limited companies in the MSME sector can apply for this scheme.
- National Small Industries Corporation Subsidy
The NSIC scheme offers help to businesses in different areas such as financing, marketing, technology, etc. The credit guarantee scheme under this scheme offers financing support for supply chain and equipment procurement, marketing, and financing through partner lending institutions.
Business loans are usually availed to fund a business activity like upgrading technology or paying off employees. Choosing the right loan is key to getting the necessary funding approved. Satisfying all eligibility requirements and attaching all supporting documentation will improve your chances of getting a loan application approved.