Do Business Loans Come with Tax Benefits?

What is a business loan?

Business loan is where owners or entrepreneurs or partners need a loan to run their operations or to avail some extra working capital for the need of the hour, or simply to expand their businesses and reach a whole new level.

Business loans are the most versatile and flexible type of loan available in the market. It can be availed for pretty much all kinds of businesses and a plethora of reasons. MSMEs, SMEs, entrepreneurs can also utilize the schemes launched by the Government of India over the last decade to empower businesses with more resources and financial assistance in order to generate employment, income generation, cash flow and other aspects of the economy, MUDRA, PMEGP are some of the schemes available to business owners.

Tax Benefits and Business loans

­Tax is a very important subject regardless of the field and scale of the business. Businesses that are still in their growing stages go through a tough time just to sustain in the market initially before the start to be profitable and some might never become profitable resulting in a huge loss to the owners/entrepreneurs, hence, it is very important to try and bring down the expenses as much as possible to ensure a longer existence.

The conventional way to calculate taxes is by deducting the company’s total expenditure from the company’s total revenues for that period and the left-over amount would be the Net income of the business which is liable to taxes.

Here, the total expenditure can include any expense that is necessary for the smooth operation of business, it includes the perks and compensations provided to employees and the infrastructural costs and any cost involved in managing the business.

There are no taxes implied on the principal amount of the business loan , as the money that is borrowed is not considered as income and shall not be liable for tax deductions. Although, the interest amount that is paid along with the principal amount via the Equated Monthly Installments is tax-deductible and the terms and conditions pertaining to the rate and charges will vary as per the lenders policies, business model and terms. Taxes are applicable on the interest amount because the principal amount one pays to the lender is what they have borrowed for the business operations and needs but the interest amount is the additional amount that is to be paid as a borrower which comes from their income and so is a taxable event.

The interest amount can also be categorized as a table business expense and could again be exempted to some degree depending on the terms and conditions of the business loan. To file for this deduction in taxes on interest amount one needs to consult their lender and will have to meet the eligibility criteria set by the company. This helps in the reduction of total tax amount as the interest amount is deducted directly from the gross income i.e., the revenue.

Apart from the Business loans, even personal loans taken by entrepreneur/business owners are taxable if the loan is taken to serve the needs of the business. In a situation where a second loan is taken to clear the previous loan from the existing lender, then the taxes will not be applicable to the principal and as well as interest amount of the previous business loan and it won’t remain a tax-deductible event anymore. However, the taxes will be levied on the new loan interest amount as that will be considered as the payment made from the business earnings/Income. The main reasoning here is that the amount that is lended from a third-party company/Bank or any type of financial institution is not an entrepreneur/business-owner net income or profit, it is the amount required to run the business operations. Income is what is left over after deducting all the business expenses from the gross-income(revenue) and taxesare implied on one’s earnings/income and not on the money that is supposed to be repaid to someone or some company.

Benefits of Business loans

Collateral: Business loans do not require collateral or security to avail the amount. Depending on the business and the eligibility criteria of the lender the loan will be disbursed in partial amounts that is totally collateral free. Borrower have the peace of mind as there is no loss of assets if the business does not flourish and ends up as a failure.

Quick Funding: Loan amount is disbursal process is very swift compared to other loan schemes. Business loans require little documentation and companies usually have a dedicated department to speed up the processing.

Higher Loan amount: Compared to personal loans, business owners can avail a relatively higher amount on the basis of business health. As business is considered an entity and not an individual, the loan amount and eligibility limits support a higher amount as per the business needs.

Eligibility Criteria

There is a basic eligibility criterion which differs lender to lender and majority of the businesses should be able to meet the guidelines if they have a proper business model, targeted audience, standard operating procedures, financial management and a sustainability plan for near future.

Identity proof: Aadhar Card or PAN Card, valid Indian Passport or Voter ID Card/driving license, etc.

Address proof: Utility bills, Aadhar Card or Voter ID Card, valid Indian Passport, Domicile Certificate.

Proof of business: Certificates/licenses, Registration and all other documents showing the business establishment, address, association and ownership.

Income proof: Past 2 years balance sheet, income and sales tax returns, bank account statements, estimated balance sheet for 1 year and business reports certifying viability of the business.

Other documents: Clearance certificate of the pollution board, photographs of the business owner/partner, proof of SC, ST, and OBC.

• Property papers
• Business financials
• Account Books
• Agreement papers if rented property

Apart from the above, business owner should be less than 70 years of age at the time of Loan maturity and should have the business running for the last 3 years. However, some of these criteria’s might not be the same for all lenders and some might also be willing to negotiate a little depending on plenty of factors and final loan terms and conditions.

Disclaimer: No Asian Age journalist was involved in creating this content. The group also takes no responsibility for this content.