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Do Business Loans Come with Tax Benefits?


Capital is of utmost importance for every business, and one of the effective ways to secure it is through a business loan.

In India, such credit facilities are subjected to business loan interest rates. Moreover, opting for a business loan comes with various benefits. The owners can utilize the funds for multiple purposes and enjoy tax benefits on the paid interest amount to the lender.

Nonetheless, let’s examine the tax benefits of business loans that encourage business owners to seek them.

Tax Benefits of Business Loans

Business loans are a popular financing option that is offered to prospective business owners in India. It is the most convenient avenue for availing instant funds that can be utilized to meet a range of business requirements. Although owners must not forget about the accompanying business loan interest rates, the exclusive tax benefits cancel out the cons.

Business owners can enjoy certain tax benefits on their borrowings based on the type of loan they avail. Hence, they must be aware of the several tax benefits associated with a business loan, and they are:

  • Interest payment on business loans

The interest component paid back to the lender is tax deductible and can be considered as the payments made for business expenses. These business expenses can be excluded from the total revenue to get the overall taxable amount. Simply put, borrowers can subtract the interest component from necessary business expenses to reach the taxable amount. It is an effective tool for business owners to reduce their tax liabilities and utilize funds for expanding their organizations.

On the other hand, the principal amount acquired from the lender is not tax deductible and can’t be excluded as a part of business expenses. The overall principal amount availed from the lender does not involve any tax payment. It comprises a significant portion of gross income, and the tax is paid on the earned revenue by the business owner.

  • Tax benefit on business expenses

Every business involves certain necessary expenses for maintenance and operation, and those can be considered business expenses that are used for income generation. Such crucial expenses can be deducted from the entire business revenue to deduce the taxable income.

However, not all business expenses are considered revenue-producing activities. The list involves the following:

  • Expenses attracted towards wage and salary payments to the employees and staff
  • Expenditure incurred on the insurance of business and premises
  • Bonus payment to employees
  • Rent cost for office premises
  • Marketing and advertising expenditure
  • Types of business expenses

Tax Exemptions with Udyog Aadhaar Registrations

When registering at Udyog Aadhaar, you can enjoy a range of benefits, comprising easier access to loans and subsidized business loan interest rates. Additionally, you can enjoy deductions on excise and indirect taxes. If you have registered your business as MSME, you can take benefits of the discounted interest rates and tax rebates. So, if you are an owner of a small or medium-sized organization, there are various reasons to register your business under Udyog Aadhaar or as an MSME.

Although availing of business loans ensures a great scope to flourish and grow your venture, it also allows you to fulfill capital requirements that arise periodically. Besides, the tax benefits on the interest payment on business loans ensure considerable savings in the long run. Also check your EMI using a business loan calculator

Eligibility and Documentation of Business Loan

To apply for a business loan and ensure hassle-free approval, you need to fulfill the following business loan eligibility parameters:

  • Must be a self-employed individual in trading, manufacturing, or service
  • The organization must have a steady profit record in the last two years
  • The business must have a minimum turnover of Rs. 10 Lakhs
  • Applicant must be within the age bracket of 25-65 years
  • Must possess income tax returns for at least a year
  • Must have a CIBIL score of 650 and above

Apart from these, you must submit a certain set of business loan documents to support your loan application:

  • KYC documents
  • Address proof
  • One passport-sized photograph
  • Income tax returns of at least three years
  • Business ownership documents
  • Bank statement for the last 6 months

Having said so, getting a business loan has become convenient due to the use of advanced technology by reputed financial institutions. Moreover, since such financing options are subject to business loan interest rates, business owners can ensure availing tax deductions on the overall interest payment towards any kind of loan used for business purposes. Furthermore, business owners can avail of tax benefits on personal loans acquired for meeting business expenses.

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