Operating a business comes with a lot of expenses and financial commitments. Taking constructive advantage of business loan tax incentives is one approach to reducing your financial load. You heard correctly! Attractive tax advantages associated with business financing might lower your taxable earnings.
Now, let’s learn how to maximize the tax benefits associated with business loans to improve your financial position.
Are loans for businesses tax-exempt? Generally, you can deduct any interest you cover on your business from your gross income. The Income Tax Act of 1961 allows you to deduct the interest you pay on business loans from your business profit. The Income Tax Act specifies that funds used for business loans are distinct from funds used for revenue generation or profit-making for the company.
Business loans are taken out to cover a range of needs relating to the firm as well as urgent cash necessities. Funds gained in the form of business loans can be utilized for several different business-associated operations. These may be equipment purchases, supplying working capital requirements, and purchasing raw materials, in addition to business development.
Why Does a Business Loan Matter to Business Owners?
Every entrepreneur is aware of the necessity and importance of a business loan. Depending on the needs and nature of the firm, there are several good reasons why a business loan may be necessary. The business can utilize it for a variety of purposes.
This may include recruiting more staff, installing new equipment, upgrading the premises with new machines, etc. Additionally, may be expanding and growing, monitoring cash flow, restructuring debt, buying raw materials, and buying inventory. Since company loans necessitate careful planning and money management, some entrepreneurs are dubious about them. Insufficient planning can make managing finances difficult and encourage additional financial mistakes.
Taking out a business loan offers numerous tax advantages. Because the business owner can use the money for any purpose. Besides, they can deduct the interest they paid to the financial institution from their taxes. Anyone who borrows can benefit from tax advantages and reduce their tax liability, regardless of how the funds are utilized.
Business loan Types
A business or manufacturing firm frequently has to make a large investment. The necessary steps could include everything from purchasing land and manufacturing operations to working capital. Salaries and other necessary operating costs would also need to be paid in addition to the same.
In this case, a business loan can help resolve your worries. With the help of a business loan, you may pay for all of your operating costs. It’s imperative to select the business loan option that best meets your demands among the several available in India. You can choose from the ten business finance choices that we have provided below.
- Term Loan
- Loan Against Property
- Equipment Loan
- Startup loan
- Working Capital Loan
- Invoice Financing
- Business Loan for Women
- Business Overdraft
- Business Credit Card
- Cash Advance for Merchants
There are numerous reasons why interest rates on business loans can differ. The interest rate for business loans is influenced by several factors. These may include the lender, the kind of loan, the applicant’s credibility, the loan size, the loan duration, and the yearly turnover.
Furthermore, banking interest rates are sometimes less expensive than those of web-based lenders. However, banks prioritize lending to low-risk customers and have stringent lending standards.
| Lender | R.O.I | Processing Fees | Loan Amount | Cibil Score | Special Features |
| Stashfin Business Loan | 2.45% – 4% (Fixed Monthly) | 1% | ₹10.00 k – ₹5.00 Lacs | 725 | Fixed monthly interest |
| HDFC Bank Business Loan | 16% – 18% (Reducing Per Annum) | 1% – 2% | ₹1.00 Lacs – ₹75.00 Lacs | 700 | Low processing fees |
| ICICI Bank Business Loan | 16% – 18.5% (Reducing Per Annum) | 1.5% – 2% | ₹10.00 Lacs – ₹1.00 Cr | 700 | High loan amount |
| Get Vantage Business Loan | 16% – 20% (Reducing Per Annum) | 5% – 8% | ₹5.00 Lacs – ₹10.00 Cr | 700 | Large maximum loan amount |
| Recur Club Business Loan | 16% – 20% (Reducing Per Annum) | 2% – 3% | ₹10.00 Lacs – ₹10.00 Cr | 650 | Long maximum loan amount range |
| Flexi Business Loan | 18% – 30% (Reducing Per Annum) | 3% – 4% | ₹1.00 Lacs – ₹25.00 Lacs | 700 | Flexible loan options |
| Indifi Unsecured Business Loan | 18% – 30% (Reducing Per Annum) | 3% – 4% | ₹1.00 Lacs – ₹30.00 Lacs | 700 | Unsecured loan |
| ARKA Business Loan | 18% – 20% (Reducing Per Annum) | 2% – 3% | ₹1.00 Lacs – ₹30.00 Lacs | 700 | Medium loan amount range |
| FINAGG Supply Chain Finance | 18% – 20% (Reducing Per Annum) | 2% – 3% | ₹1.00 Lacs – ₹50.00 Lacs | 700 | High maximum loan amount |
| PaySense Business Loan | 18% – 22% (Reducing Per Annum) | 2% – 6% | ₹50.00 k – ₹10.00 Lacs | 700 | Low minimum loan amount |
| Hero Fincorp Business Loan | 19% – 27% (Reducing Per Annum) | 2% – 4% | ₹1.00 Lacs – ₹5.00 Lacs | 630 | Small vertical business support |
| Ambit Finance Business Loan | 20% – 28% (Reducing Per Annum) | 3% – 3.5% | ₹2.00 Lacs – ₹50.00 Lacs | 675 | Moderate processing fees |
| Choice Finserv Business Loan | 22% – 26% (Reducing Per Annum) | 2% – 3% | ₹1.00 Lacs – ₹7.50 Lacs | 700 | Lower loan range |
| MAXEMO Business Loan | 22% – 30% (Reducing Per Annum) | 4% – 8% | ₹5.00 Lacs – ₹30.00 Lacs | 650 | Higher processing fees |
| Ayefin Business Loan | 28% – 29.5% (Reducing Per Annum) | 2.5% – 3% | ₹5.00 k – ₹3.50 Lacs | 650 | Small business friendly |
| Faircent Eazzy Loan | 25% – 30% (Reducing Per Annum) | 7% – 8% | ₹50.00 k – ₹1.50 Lacs | 630 | High processing fees |
| Faircent Business Loan | 25% – 30% (Reducing Per Annum) | 7% – 9% | ₹50.00 k – ₹10.00 Lacs | 550 | Higher loan range |
| Lendingkart Business Loan | 16% – 36% (Reducing Per Annum) | 2% – 5% | ₹5.00 k – ₹5.00 Lacs | 650 | Large range of interest rates |
Tax Deductions Apply to Interest Paid on Business Loans
For any person or company, taking out a business loan is an extremely crucial choice. It does, however, provide tax advantages because you can simply deduct the interest charges as a business expense. The expenses that a business incurs to make money are deductible from taxes. To determine the amount of tax, the various business expenses are subtracted from the total revenues.
To Find your Tax Liability, Use This Formula: Business Expense – Total Revenue = Tax Amount.
Since business loan interest is included in these costs, it contributes to the tax break. An enormous benefit for business owners is the ability to deduct interest payments as expenses.
The Business Loan Principal is Not Tax Deductible
A business loan’s principal is not tax deductible. Income tax does not need to be paid on the principal or sum taken out. Furthermore, it cannot be subtracted from your gross income. Typically, tax is paid based on a business’s net revenue for the fiscal year.
A Basic Overview of Tax Benefits for Business Loans
- The interest paid on business loans is tax-deductible.
- There is no tax deduction for the principal loan amount, and there is no tax benefit.
- Typically, a business loan’s interest is subtracted from gross income.
- Tax deductions apply to personal loans carried out for company reasons.
- reduces the overall amount of taxes that must be paid.
- Deducting business expenses from total firm revenue yields the tax liability.
- To receive the interest deduction, you must meet certain criteria that the lender has specified.
- The business loan that you borrow from the lender is not tax deductible because it is a form of funding rather than your income.
- Amounts paid back in the form of EMIs are not tax-deductible.
Eligibility Criteria to Apply for a Business Loan
The following organizations, including MSMEs, SMEs, business owners, small-scale traders, retailers, suppliers, private limited and public limited companies, sole proprietorships, partnership firms, limited liability partnerships, etc., are eligible to apply for business loans.
- Age Requirements: you must be at least 18 years old when applying for a loan and no older than 65 when the loan matures.
- The loan amount ranges from Rs. 10,000 to Rs. 50 lakh. Based on the applicant’s eligibility, the amount may vary.
- Duration of Repayment: 12 to 60 months
- Credit/CIBIL Score: 650 or above
- The candidate must be an Indian national with no criminal history.
- Business Vintage: At least two years following the incorporation date
- Experience in Business: At least one year
- Business Turnover: The financial institution will decide.
Pros and Cons of Taking Out Business Loan
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5 Things to Consider Before Filing a Business Loan Application
Before Filing for a business loan, borrowers need to be aware of these things:
Interest Rate: Lenders offer different interest rates for business loans. To save money on interest, applicants can compare the interest rates being given by several lenders. You can choose the one with the lowest rate.
Turnaround Time: Potential borrowers should be aware of how long a bank or NBFC will take to approve and disburse a business loan. Generally speaking, borrowers choose lenders who provide business loans faster. The kind of business lending program and the kind of collateral provided would determine the turnaround time.
Credit Score: Candidates with credit scores of at least 700 are often more likely to get approved for business loans. Additionally, some lenders provide business loans with cheaper interest rates to borrowers with excellent credit ratings.
Processing Charges: Before asking for a business loan, borrowers should be aware of all processing charges. They should also check if there are other costs assessed by the financial institution.
Which Type of loan—Personal or Business—Best Meets your Needs?
Business loans are limited to being utilized to finance specific business-associated operations. These are like supporting startup growth or raising working capital. Personal loans can be effectively used to suit individual as well as company requirements. Business loans can be either secured or unsecured, although personal loans are generally unsecured.
Personal loans are available as overdraft facilities or term loans with EMI-based repayments. Term loan facilities, limit-based services like cash credit accounts and overdraft protection, bill discounting, non-fund-based services like bank guarantees and credit letters, etc. are the various forms in which business loans are provided.
Those who want to apply for unsecured business or personal loans to take out smaller loans without collateral can do so. Individuals with more intricate needs and/or more flexible payback schedules should select suitable business loan plans according to their specifications.
How Can One Apply for a Loan for Business Purposes?
Applicants seeking business loans can apply directly at bank branches. They can also apply via the official websites and applications of banks and NBFCs. Individuals can also evaluate interest rates and other benefits provided by different creditors by visiting digital FinTech platforms like Refer Loan.
Bottom Line
In addition to offering financial assistance, business loans often have attractive tax advantages that might result in cost savings. You can drastically lower your taxable income by utilizing these deductible expenses. A thorough understanding of tax regulations and appropriate documentation are necessary to maximize these advantages.
If you’re an experienced business owner or entrepreneur, business loans could be a lifeline. The money could be used to launch a new company or to grow the current one. Getting a quick business loan may be impacted by the tax benefits associated with interest payments and some business expenses like incentives or wages.
It is important to continuously evaluate your business’s needs. In the context of the present marketplace, before applying for any kind of business loan, do it wisely.