A business loan is an important financial tool when you are planning to start a business of your own. It will help you in meeting your business-related requirements. However, if you are worried about the tax implications after applying for a business loan, then you can relax a bit. This is because business loans are eligible for tax deductions.
Although the taxes you own for availing of a business loan cannot be completely evaded, there is a way out. As per the Income Tax Act of 1961, availing of funds through loan and earning profit for your firm are two different things. Thus the interest charged on the loan is worth tax deduction. However, the principal component is not eligible for tax deductions.
Tax benefits on business loans
When you apply for a business loan you earn tax deductions. In India, there is a varied range of interest rates on business loans depending on different lenders. The interest loan is labeled as an expenditure as the funds are employed for business needs. The interest charges imposed on the business loan are considered as fees that have to be repaid to the financial institution. Hence, the interest amount paid for the business loan is considered to be an expense.
While making the income tax calculation of your enterprise the payable interest is rebated from the entire earning of your business. Thus it is essential to keep accurate records of the loan so that if needed you can submit these to the income tax division as evidence of your expenses.
Tax-deductible expenses that should be kept in mind
Usually, the tax is payable on the total income gained by the business in a single financial year. However, the calculation of taxes on this income is made after making certain deductions from the total earnings of the business. According to the income tax terms and conditions, the higher the gross profit the greater is the tax levied. Thus to reduce the imposed taxation every expenditure must be carefully reduced from the total income.
EMIs can significantly help in reducing your income taxes. Hence, it is important that you check the rates of interest, processing charges, and other loan-related charges imposed by different lenders before availing of a business loan. Having a thorough knowledge about these aspects will aid you in determining the tax benefits of the business loan.
The principal amount on the business loan is not eligible for tax deductions
The principal component is not eligible for tax deductions when you apply for a business loan. Therefore while making the tax calculations, the borrower cannot minus this amount from the entire income of the business. The principal component is not a business revenue, it is gained from the lender and hence has to be paid back. Thus, it is not termed as business expenditure.
Therefore, the principal amount of the business loan cannot be a part of your earnings. Moreover, this amount can neither be removed from your total earnings nor do you have to make tax payments for this.
Perks of a business loan
Financing your business helps you to sustain your business by making it more functional and alive. It will help you to keep abreast with your business requisites such as funds for purchasing raw materials and resources, paying wages to your labors, and so on. Besides these, we have laid out a few of the merits of obtaining a business loan in India.
- The funds can be utilized to serve multiple business-related purposes.
- Almost every bank and NBFCs offer business loans. Thus you can choose any based on your preference.
- The loan repayment is quite flexible thereby making the reimbursement process pretty much easier.
- The government of India has streamlined various business loan schemes with convenient repayment methods and competitive interest for the MSME and SMEs to help them grow their business without much hassle.
- The business loan interest rate is eligible for tax deductions as it is thought of as business expenditure. The interest cuts help to reduce the business owner’s tax obligations.
With the advancement of technology, it is now possible to avail of a business loan seamlessly. Moreover, processing and disbursement of the loan have become quite quick and hassle-free. You can acquire this loan from any financial institution. This will definitely help you to expand your business and make it more dynamic.