Posted on
Jul 01, 2019

If you’re considering taking out a business loan but are hesitant because you’re unsure of the tax benefits on business loans, you can stop worrying: Business loans are tax-deductible!

Fundamentally, business loans do not affect the amount of taxes owed. According to the Income Tax Act 1961, borrowing money is not equivalent to income in a business. Therefore, interest on a business loan is tax-deductible, but the principal amount is not. However, some guidelines must be observed.

Obtaining a business loan depends entirely on the requirements of the business owner. As a result, they cannot pick between various types of business loans based on the associated tax benefits in India. A business owner can use the loan proceeds to reduce the income tax they owe to the government each year.

Whether new or small, business loans are accessible at a business loan interest rate, the additional amount required to obtain a business loan.

What Tax Benefits Can be Availed Under a Business Loan?

Funding serves as the lifeline of the firm, keeping it afloat and productive. Business loans are financial instruments designed to meet a business’s monetary requirements. From fulfilling working capital requirements to purchasing inventory and from paying employees to paying rent for office or industrial space, a business loan eligibility may assist you with everything. As a result, a business loan is crucial to the growth of a particular organisation. Taking out a business loan in India has several benefits for borrowers, including the following.

  • Business loans for new business are widely available and offer borrowers flexible repayment alternatives, which makes loan repayment a little simpler.
  • To assist SMEs, the government has introduced numerous lending schemes with highly flexible terms and conditions and, of course, a low interest rate.
  • Interest on business loans is tax-deductible as a business expense. The decrease in interest payments reduces the borrower’s tax liability.
  • Calculate your tax liability by deducting business expenses from total business revenue.
  • To qualify for the interest deduction, you must meet specific fundamental criteria established by the lender.
  • Because the lender considers the business loan to be funding rather than income, it is not tax-deductible.
  • The amount of the repayment in the form of an EMI is not tax-deductible.

Tax Benefits in India

In India, business loans are subject to interest rates, and their interest rates are defined as an expense that the borrower must pay in exchange for borrowing money from the lender. Notably, interest charges are the fees associated with borrowing money from a lender for business purposes. There are tax advantages associated with interest charges. Therefore, let us examine the following tax benefits on a business loan in India that may encourage the business to take one out.

  • Interest paid is tax-deductible and could be reclaimed as business costs.
  • Business expenditures are those incurred in the course of managing business and could be subtracted from total income to determine the tax amount.
  • It’s a great method for small business owners looking to minimise their tax liability while growing their businesses.

The business loan interest rate varies by lender, and it is classified as an expense due to the loan cash used for commercial activities. As a result, the interest of the loan repayment is claimed as a tax-deductible expense.

Interest paid is deducted from gross revenue while computing your business’s income tax. Maintain better track of your business loan and present proof to the income tax authorities upon request.

Principal Amount is not Tax-deductible

The principal amount of a business loan is not tax-deductible. Therefore, when calculating your taxes you cannot deduct this amount from your overall business revenue.

The reality is that your firm does not earn the principal amount. The funds are obtained through a lender and must be repaid. As a result, it cannot be considered revenue for your firm.

It means that the amount of the company loan cannot be deducted from your gross revenue. Additionally, you are not required to pay tax on this amount.

What Expenses are Tax-deductible?

Traditionally, tax is levied on a business’s net profit for the financial year. This net profit or revenue is determined after certain necessary expenses are deducted from the gross income. The income tax brackets are progressive, meaning that the higher the net income, the higher the taxation. Therefore, to minimise taxation, all expenses should be carefully subtracted from the gross income.

EMIs on a business loan are items that might help you reduce your income tax liability. They can have a considerable effect on lowering your taxable income. Therefore, before you apply for a business loan, it is vital to research interest rates, processing costs, and other loan-related fees. Acquiring this information can assist you in determining the tax advantages that a company loan may provide.

Key Points to Consider While Obtaining Business Loans Online in India

The following are essential elements that a business owner should consider when applying for a business loan.

  • The monthly interest on the principal amount paid is tax-deductible and can be included in the borrower’s business expenditures.
  • The principal included in overall income is not deducted from taxable income when calculating adjusted gross income.
  • Because the loan is not included in the borrower’s income, it cannot be included in the borrower’s taxable income.

If the amount is made via an EMI that includes both principal and interest, keep in mind that the interest of the EMI, not the entire EMI, is tax-deductible. It is possible to contact the lender to the interest component of the EMI.

What are the Benefits of Business Loans in India?

No Collateral Required

Organisation loans are a wonderful source of funding because they do not require collateral or security. If the business does not succeed or it encounters difficulties, the owner need not fear losing assets or the firm.

Rapid Funding

Due to the lender’s lack of documentation requirements, instant business loans are quickly approved. The approval process is straightforward, efficient, and convenient. Additionally, you can complete the loan application online, which saves you time and effort.

Increased Loan Amounts

Because no collateral is required, and thus, the loan size is not limited, you can apply for a larger unsecured business loan. In comparison, if you apply for a secured business loan, you will only be approved for an amount equal to the collateral’s worth.


It is worth noting that the principal amount is not tax-deductible. The borrowed funds do not generate revenue for the business. Only the borrowed sum will be repaid over the agreed-upon repayment period between the borrower and lender. Principal repayment is the process of repaying borrowed funds. Therefore, borrowing money is not considered revenue, and returning it is not considered an expense. Furthermore, it is not tax-deductible.

It has become simple to obtain a business loan today, owing to the banking sector and non-banking financial companies’ use of new technology. The financing is readily available and can assist your firm in expanding and reaching new heights.

FAQs: Tax Benefits in IndiaCan we claim tax relief on a business loan?

  • Can we claim tax relief on a business loan?
    • Tax reduction should be available on interest paid on loans used for qualifying business activities.
  • Will I be eligible for a tax deduction if I purchase another business?
    • Acquiring a business could be an investment or a way to support another firm. If the acquired business is used to operate the business actively, the interest on the amount borrowed is tax-deductible.
  • Is the principal amount of a company loan taxable?
    • The principal amount of the business loan is deducted from the business’s revenue. As a result, it is not tax-deductible.