Do Business Loans Come with Tax Benefits ?

Feb 09,2021 Abhineet Pratap Singh 0

Business owners take short term loans from banks to fulfil the requirements like expansion of units, increase production, pay bills, increase inventory, increase working capital and  to upgrade tools and equipment. The loan availed can also be used to recruit new staff and for maintaining cash flow. Every business is different in its own kind and operates in different fields. In order to grow, expansion is must and for that business owners avail loans for additional funding. Apart from burden loans also carry many tax benefits along with them. According to the Income Tax Act ,1961 a business owner can write off the Interests as business expenses. 


In this blog, we will discuss the various tax benefits and exemptions while taking a business loan. 


Interest on loans is Tax Deductible    

A business owner avails the loans to smoothly run its operational activities. According to the income tax Act , 1961 of India a business owner can get an abstraction on the interest of the loan amount and which lastly paid out of profits. You can calculate your tax liability by subtracting total expenditures from total revenue. 

           Grossl Revenue - tax - Total expenditure = Taxable income  

It's one of the benefiting strategies used by the business owners for saving money.


What are Tax Deductible Business Expenses ?

Tax deductible business expenses are the expenses that help in operation and  maintenance of business. In order to run the business smoothly Business owner has to pay many expenses. Like Bonus paid to employees, wages paid to the staff, insurance of the business, rent of other premises, advertising and promotion and expenses related to stationery. 

The interest on loans taken from outside is treated as a business expense so it is a tax deductible expense. 


Principal Amount Tax Deductible or Not !

Principal amount is the amount that you can take from an outside party which may be a bank or any other financial institution. The principal amount is not earned by you, it is the amount you take from others to keep your business running. However, the principal amount is not tax deductible and does not give tax benefits. Its is the money that you owe to the fund lender 

The principal amount is not deducted from the taxable income. You are liable to pay the income tax on the amount of principal or the money borrowed from outside and hence it is added to the gross income.    


Benefits of a Business Loan

A  Business loan has more advantages than its disadvantages. The borrowed money can be used for expansion and growth, building an outstanding credit report,  upgrading tools and equipment, increasing inventory and enhancing machinery. Apart from all discussed factors a business carries multiple tax benefits along with it. Under the The income tax Act, 1961 provide many exemptions related to business loans. 

  • The interest on loan is deducted from the gross income.

  • Less tax 

  • The interest amount on loan is tax exempted

  • Personal loan taken to grow your business is also tax deductible

Note: At the time of repayment of the loan the installments include both the installment amount and the interest. Only the interest is tax deductible!



Q1. Is it necessary to apply for a loan only when to expand and grow business?

Ans. No, you can apply for a loan for many other reasons. Most of the business owners presume that business loans are only for expansion and growth but there are many other reasons like you can also avail the loan for building a good credit report or to recruit new staff.

Q2. Is the principal amount of the loan will be tax deductible or not?

Ans. The principal amount is the amount taken from others is not the income of your business. Neither it is treated as the business expense nor give any tax benefits to your firm. That signifies that you have to pay the tax on the principal amount of the loan.  

Q3.Is the loan taken for upgradation of machinery and equipment is tax deductible?

Ans. Business loans are availed for the upgradation of the machinery and equipment and they are considered as business expenses. The interest of these types of loan is tax deductible and is exempted by Income Tax Act, 1961.

Q4. Is this exemption also applicable when a business owner wants to establish a new firm? 

Ans.This question is a little tricky to answer because different accountants will give you different advice. It's simple, establishing a firm will not bring any benefit to the current business. Taking a loan for establishing a new business is tax deductible. 

Q5.What is the interest on business loans?

Ans. There are multiple firms in India who provide Business loans to uplift the small business in the economy. Every bank or financial institution has different rates at which they provide loans.

Q6.what all is needed to avail a business loan?  

Ans. Before availing the loan there is a process to follow, you need to submit a signed application form along with identity proof, a residential proof , your banking statement of last six months transactions, a certificate of business existence and a business profile.




Related Post

0 Comment

Leave A Comment