Business loans are availed to meet the cash requirements and to fulfill the expansion needs of a business. When you receive funds in the form of a business loan, it can be used for any purpose in the business. There are no restrictions with regard to the end use. You can use the funds for the expansion of the business, to purchase raw material, to enter a new market and to consolidate debt. There are different types of loans available in the market. It is important to understand the different business loan products and then make a decision.
Interest amount is tax deductible
There is a lot of confusion about the tax benefits on a business loan. If you are not sure whether business loans are tax deductible, the answer is yes. However, it is important to remember that only the interest paid on a business loan is tax deductible. The interest is subtracted from the gross income.
According to the Income Tax Act 1961, the interest paid on business loan is not the same as business income, or profit of the business. Interest on business loan is the amount of money you need to pay to the lender to get access to funds. The amount will be based on the rate of interest applicable on the loan. It is paid over and above the total amount borrowed. The tax deduction on interest payments is a huge benefit for business owners.
Principal amount is not tax deductible
Only the interest amount on the loan is tax deductible and the principal amount is not. The principal amount is the total loan amount that is taken from a bank or an NBFC. It is the loan amount and not the interest on the loan. Hence, the principal amount is not deductible from tax. You do not need to pay income tax for the amount borrowed but you also cannot deduct it from the gross total income. The tax will be payable on the net income earned in the financial year.
There are times when the total interest amount on the loan is significantly high and it can lead to a huge outflow of funds. Since the interest amount is tax deductible, it can be beneficial for a business owner. No matter the loan amount, a deduction of interest on the loan helps businesses in more than one manner.
Access business requirements and then apply for a loan
There are various types of business loans available in the market today. There are many lenders who offer the loan at friendly terms of repayment. If you are considering applying for a business loan, it is best to access the business requirements, identify the purpose of borrowing and then make a decision. You need to identify the amount of funds you need and where you intend to use the funds. This will help choose the right loan product for your business needs.
Tax deduction of interest can make a huge difference to the amount of tax payable on the income generated. It works in favor of businesses which is why a business loan remains the first choice of borrowers. It has a simple eligibility criteria and a quick approval.