How to Save Income Tax Benefits on Loans in India?

Written by : Knowledge Centre Team

2026-07-30

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Have you ever wondered how loans help in tax saving, and in what situations? The provision for tax deduction on the payment of EMIs on home loans or personal loans has been introduced to make housing more affordable. Various sections of the Income-tax Act, 2025, provide for tax benefits on the repayment of loans. However, not every loan qualifies, and not every rupee you repay is eligible; the tax benefit depends on the type of loan, how you use it, and which tax regime you file under. So how do loans help with saving on taxes? Let’s discuss this in detail in this blog.

Key Takeaways

Home loan interest up to ₹2 lakh per year is deductible under Section 22 (formerly 24), only under the Old Tax Regime
Principal repayment up to ₹1.5 lakh qualifies under Section 123 (formerly 80C) if the property is held for 5+ years
Section 130 (80EE)'s extra ₹50,000 benefit only applies to loans sanctioned between April 2016 and March 2017
Education loan interest under Section 129 (80E) has no upper limit and is claimable for 8 years
Personal loans & LAP save tax only if funds go toward property, business, or asset purchase

Ways Loans Can Help You Save Income Tax in India

Home loans, education loans, and even certain personal loans come with provisions under the Income Tax Act 1961 that let you reduce your taxable income significantly, sometimes by lakhs of rupees a year. These benefits are spread across different sections, each with its own conditions, limits, and eligibility rules. With India transitioning to the Income Tax Act, 2025 (effective Tax Year 2026-27), the same provisions carry forward under new section numbers; we've noted these alongside the familiar ones below.

Quick note: Most of the deductions below Sections 130/80EE, 22/24, 123/80C, and 129/80E are available only if you opt for the Old Tax Regime. If you have moved to the New Tax Regime (now the default), these specific deductions would not apply to you, except interest on a let-out (rented) property, which remains deductible under both regimes.

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Under Section 130 (formerly Section 80EE):

If you have purchased your first house with a home loan, you are eligible for tax benefits upto ₹50,000 on the interest paid on your home loan under Section 130 of the Income Tax Act 2025 (formerly Section 80EE of the Income Tax Act 1961). There are, however, a few conditions that you must check before claiming deductions under this section. Deductions are applicable only if:

You have taken a loan from a bank or a non-banking financial institution
The stamp duty value of the house does not exceed forty-five lakh rupees
The amount of loan sanctioned for the acquisition of the residential house property does not exceed thirty-five lakh rupees
The loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2016, and ending on the 31st day of March, 2017
You do not own any other house except the one for which you have availed the home loan

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Under Section 22 (formerly Section 24):

Section 22 (previously called Section 24) is applicable to home loans availed for a property on which you currently reside. The deduction is applicable to the repayment of loan interest, and the exemption limit is ₹2 lakhs. Loan Against Property (LAP) depends entirely on how you use the loan amount. If you use the LAP funds to purchase, construct, or repair a residential property, the interest paid qualifies for deduction under Section 22 (formerly Section 24), up to ₹2 lakh a year for a self-occupied property, with no upper limit if the property is let out. This is the answer to how you can get a tax benefit on a loan against property.

If, instead, you use the LAP funds for business purposes, the interest paid can be claimed as a business expense, reducing your taxable business profits. And if the funds go toward acquiring another asset, such as stocks or a second property, the interest can be added to the cost of acquisition, lowering your capital gains tax when that asset is eventually sold.

Note: Unlike a fresh home purchase loan, the principal repayment on a loan against property is generally not eligible for deduction under Section 123 (formerly Section 80C). So, if you're exploring how to save on income tax using an LAP, focus your planning on the interest component and its end use, rather than the principal.

Did You Know?

For Assessment Year 2024-25, about 72% of income tax returns in India, 5.27 crore out of 7.28 crore, were filed under the New Tax Regime.

Source: ET

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Under Section 123 (formerly Section 80C):

Sections 22 and 130 make provision for the deduction of interest repayments on loans. Under Section 123 of the Income Tax Act 2025 (formerly Section 80C of the Income Tax Act 1961), however, you can claim a deduction on the repayment of the principal amount of your home loan. The limit for exemption under Section 123 is ₹1.5 lakhs, and it is applicable under the following conditions:

The home loan has been availed for the construction or purchase of a new property
The property has not been sold within five years of purchase
If the property is sold within five years, the taxpayer will have to repay the exemptions claimed on the home loan for the year the property was sold

Under Section 129 (formerly Section 80E):

If you have taken an education loan, you can claim deductions for any amount paid by way of interest. There are a few conditions under which you can claim benefits under Section 129 of the Income Tax Act 2025 (formerly Section 80E of the Income Tax Act 1961) for educational loans:

The loan must be availed under the name of the taxpayer to finance his higher education or for the purpose of higher education of his relative
Deductions can be claimed only for 8 years, starting from your first loan payment until the interest is fully paid

Tax Benefits on Personal Loans in India

You can claim tax deductions on personal loans in certain cases. These pertain to the acquisition of assets, renovation, or construction of houses. In case of house improvement and construction of property, you can claim deductions under Section 22 (formerly Section 24) and Section 123 (formerly Section 80C) as mentioned above. So yes, if personal loan funds are used towards these purposes, you will be eligible for exemptions under Sections 123 and 24.

Additionally, if you avail a personal loan for business, the interest component of the loan repayment is eligible for deduction. The interest is deducted from the profits made by the business, thereby helping you save on taxes on a personal loan. On the other hand, if the personal loan is used to acquire an asset, such as stocks, jewellery, or property, the interest component can be treated as the cost of acquisition of the asset, resulting in reduced capital gains when the asset is sold. This, in turn, reduces your tax liability.

Conclusion

Loans, when used strategically, do far more than fund your goals; they actively lower your tax outgo. Whether it's a home loan under Sections 22 and 123, an education loan under Section 129, or a personal loan channeled towards asset creation or business use, each comes with its own set of rules, caps, and eligibility conditions worth understanding before you file.

Remember, most of these deductions apply only under the Old Tax Regime, so it's worth comparing both regimes before deciding. With the Income Tax Act, 2025 set to reshape section numbers from Tax Year 2026-27, staying updated will help you claim every benefit you're entitled to, without any last-minute surprises.

Glossary

Old Tax Regime: The traditional tax system allowed deductions, but with higher slab rates than the New Regime
New Tax Regime: The default tax system since FY 2023-24, offering lower slab rates but very few deductions or exemptions
Self-Occupied Property: A residential property the owner lives in, as opposed to renting it out to a tenant for income
Stamp Duty Value: The value of a property as assessed by the state government for registration purposes
Principal Repayment: The portion of an EMI that goes toward repaying the original loan amount borrowed

FAQs

Yes, but only conditionally: the tax benefit on personal loans in India is available only if the funds are used for eligible purposes such as home construction/renovation, business, or asset acquisition, not for personal consumption. This is why "can personal loan save tax" doesn't have a blanket yes; the end-use of the loan is what determines eligibility, not the loan itself.

No. Personal loans do not come under 80C, or now called Section 123, directly, since it only covers principal repayment on a home loan taken specifically for the purchase or construction of a residential property. However, if you use a personal loan for such construction, the amount used may indirectly qualify, making the personal loan deduction for income tax purposes depend entirely on how the funds are applied.

To save tax on loan against property, the key lies in the end-use: if the LAP funds are used to purchase, construct, or repair a residential property, the interest qualifies for deduction under Section 22, similar to a regular home loan. If the funds are used for business purposes instead, the interest can be claimed as a business expense, reducing your taxable business income.

Income tax benefit on a loan against property depends heavily on how the loan is used; interest deduction under Section 22 applies only if the money funds property purchase, construction, or renovation. It's important to note that, unlike a home purchase loan, the principal repayment on a loan against property is generally not eligible for deduction under Section 123.

No. The loan amount itself is never treated as income, so a personal loan is not taxable in India, nor is any other loan amount, since it's a liability you're obligated to repay rather than earnings. This holds true across loan types, meaning that whether a loan is taxable in India is best answered by focusing on available interest deductions rather than on the tax on the loan amount itself, which is never applicable.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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How Do Loans Help Us Save Income Tax in India?

Key Takeaways

Ways Loans Can Help You Save Income Tax in India

Save Taxes While Building Long-Term Wealth

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