Tax benefits in business loans

June 19, 2023

Introduction

Business loans can serve many purposes. Some help businesses expand while others help keep business operations going in times of difficult cash flow. There are several different types of loans provided by various financial institutions such as regular banks or NBFCs, specifically created to cater to the requirements of a business. Some of the more such common loans are:

  1. Term Loan
  2. Start-up Loan
  3. Working Capital Loan
  4. Loan against property for SME
  5. Invoice Financing
  6. Equipment Financing
  7. Business Loan for Women
  8. Overdraft
  9. Merchant Cash Advance
  10. Business Credit Card

The specific purpose for each of these loans is beyond the scope of this article, but if you would like to know more about them please leave a comment below. However, these loans can be taken for purposes such as paying rent and/or salaries of staff, purchasing inventory, cash flow requirements, etc.

Benefits

One of the biggest benefits of a business loan comes from the fact that the interest paid on the loan can be considered an expense and therefore is tax-exempt. This may help lower one's tax bill.

Another advantage of a business loan comes with timely repayment of the installments. Many businesses struggle to avail a loan but once a loan is provided, its timely repayment helps establish a strong credit record thereby giving future lenders a certain level of confidence to provide larger loans.

One thing to be considered while taking a loan is that the principal amount of the loan is not tax-deductible since it is not an income of the business. Also, no tax is needed to be paid on this amount as well.

Conclusion

A loan for business can prove beneficial when done with due deliberation and a well-defined objective. It can not only give the promoter(s) peace of mind for the certainty it provides in the business operations but also possibly allow for the expansion of that business. This in addition to a chance to reduce the tax bill means such a loan can be used for the advantage of the business.



Note: Above details are meant for generalized situations and shall not be used as a legal basis for any particular situation readers may have. We do provide tax consultations for specific scenarios and can be reached through our contact us form.



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