What are the tax benefits of taking a business loan in India?

tax benefits of taking a business loan

A business loan gives you some much-needed financial support for your small business. You can apply for a business loan to expand your business, purchase a piece of machinery, or manage operations expenses. A business loan helps you build and maintain a cash flow and ensures that your business operations run smoothly. Getting a business loan also gives you certain tax benefits! Here are some tax benefits of taking a business loan in India. 

Is a business loan tax-deductible in India?

As per the Income Tax Act, 1961, the business loan is not tax-deductible, but the interest you pay on a business loan from your business profits is applicable for the deduction. Business loan interest is what you pay your lender every month in addition to a portion of the principal loan amount. When you take a business loan, you repay the loan in monthly instalments known as EMIs. The EMI amount due every month is a combination of a principal amount and the interest your lender charges on the loan they give you. 

Remember, only the interest you pay is tax-deductible, so it helps you lower your tax liability. The principal amount is taxable even though the Income Tax Act also states that the business loan amount you get is not the same as your business income or revenue. 

Click here to learn more about business loans EMI.

What are the tax benefits of taking a business loan?

1. Tax benefits from the interest on a business loan: 

The money you spend to grow your business is tax-deductible. A tax-deductible expense is one that you don’t have to pay tax on. It, therefore, reduces the overall tax that you need to pay. Since the interest you pay to your lender is a business expenditure, it is deducted from the total revenue, helping you reduce your tax liabilities.

Tax-deductible expenses are usually used to generate income. Your business expenses are subtracted from your revenue to determine the overall tax you are liable to pay.

The good news is the interest you pay on any business loan product, such as Term Loans, Working Capital Loans, and Machinery Loans is tax-deductible. So, the tax benefits of taking a business loan are irrespective of the type of business loan you take.

2. Tax benefits from the business expenses:

The money you spend to manage or grow your business is considered a business expense, and any type of business expenditure is tax-deductible. That’s because such expenses are not part of your income and are therefore deductible. 

Here is a list of business expenses that are excluded from your business revenue:

  • Employee wages
  • Office rental cost
  • Office supply cost
  • Business insurance expenses 
  • Advertising and marketing expenses
  • Employee bonus

If you spend any part of your business loan on expenses listed above, that amount is tax-deductible, making some of your business loan tax-free.

3. Tax Benefits for Machinery Purchased with Business Loans

When you buy machinery or equipment for your business, you use them for many years. Over time, these things lose value because they get old or worn out. This decrease in their value is called depreciation.

If you took a business loan to buy these, you can still claim depreciation on them, which reduces what you owe to the government as taxes.

For example, if you bought a machine for Rs. 1 lakh and it has a useful life of 10 years, you can claim a certain amount of depreciation each year for those 10 years. This depreciation amount can be deducted from your business’s taxable income.

When you apply for a business loan with CreditEnable, one application gives you access to our 25+ lender partners, including ICICI Bank, Kotak Mahindra, and Bajaj Finserv. After we check your eligibility for the loan, we match you with the most appropriate business loan lender and product so that you can achieve your business goals fast. We guide you throughout the loan underwriting process, ensuring you get the loan as soon as possible. 

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