Tax Benefits on Business Loan in India

Every business faces a financial crisis at a certain stage of development and looks for a business loan to fulfill their requirements. There might be several reasons for availing such loan which depend on the type of business.  

These funds are used for installing and upgrading plants, the expansion and growth of a business, hiring new employees, revamping old machinery, marketing & promotion of a business, restructuring the debt, managing cash flow, buying the raw material, purchasing the inventory and much more. 

There are some business owners being suspicious about a business loan as it needs proper management and planning of funds.  

With inadequate planning, it might become inconvenient to manage finances & lead to other financial failures. 

Tax benefits offered to the borrower by the tax authorities of India which are listed below: 

The interest paid on a business is tax-deductible 

The borrowed amount paid back to the bank in the form of interest is tax-deductible and it should be easily written off as the interest payments made for your business expenditure.  

The expenses that are used to make income from business are known as business expenses and are deducted from the total revenue to avail a tax amount.  

Formula to Calculate Tax Liability:  

Business Expenditure – Total Revenue = Tax Amount 

In short, an individual can deduct the interest amount from the expenditure of a business to get the taxable amount. This is beneficial for entrepreneurs and small business owners to lower their tax liability & use funds for the expansion of a business.  

Tax-deductible Business Expenses 

The business expenses acquired to maintain and run operations can be deducted from the total business revenue to get the taxable income.  

(Gross Revenue - Tax-deductible Expenses = Taxable income) 

Listed below are some business expenses that are not a part of a business revenue. 

• Wages paid to the employees and staff
• The rental cost of the office premises
• Cost of leasing out a location
• Bonus paid to the employees
• Meals, gifts, and entertainment expenses
• Expenses incurred on the insurance of the premises and business
• Marketing and Advertising expenses
• Office supplies such as daily maintenance costs, stationery, etc...

Important points for the tax benefits on a Business Loan 
 

• The interest amount on a business loan is tax-free.

• Tax liability is evaluated by deducting the business expenses from the total revenue of a business.

• It helps in a reduction of the total tax amount to be paid.

• To get the deduction on interest, you have to meet some basic criteria determined by the lender.

• The personal loan provided for business purposes is also tax-deductible.

• Bank loans are availed in the form of funding which is not counted as income. Hence, it is not a tax deductible.

• The amount that is paid back in the form of EMI is not tax deductible.

• The interest paid on such loan are basically deducted from the gross income.

Detailed Information about a Business Loan 

Several banks & NBFCs offer business loans for news as well as an existing business, these funds can be utilized for setting up own business & for boosting existing units. Before opting for a loan, you must compare the interest rate set by different lenders to grab the most affordable rate. 

Current Business Loan Interest Rate and Processing Fee by Top Banks 

Benefits of a Business Loan 

Collateral-free loan: - It is an unsecured loan where an individual does not need to pledge any collateral in terms of obtaining a business loan. Based on the applicant profile collateral-free loans are offered up to 2 Cr. 

Less paperwork: - In earlier days business loan means a lot of documentation work which reflects to creating a burden on handling business operations, to ease the process less paperwork become the smartest way to save time. 

Attractive Interest Rates: - There are plenty of best deals provided by several banks and NBFCs, interest rates may differ from lender to lender therefore, it helps you to choose the most affordable interest rates with a good repayment tenure. 

Flexible Tenure: - Banks & NBFCs provide freedom of flexibility usage. Basically, term loans are categorized into 2 different repayments known as short term & long term. Business owners can select tenure according to their needs and requirements.  

Online Application: - Business loans provide you the comfort of loan availability, and easily can be accessed from anywhere and anytime. Online applications are an ideal way to save your energy & time. 

Business Loan Calculator 

Equated Monthly Installment (EMI) helps an individual to evaluate their monthly payable EMIs. This amount will be paid regularly to banks or financial bodies for a certain tenure period. It is the combination of interest rate and principal that is paid in a single amount.  

The sum of payment and interest is divided by the repayment tenure. Moreover, at an initial phase, the applicable interest rates on EMIs could be higher and after each payment, the EMIs will be lower.  

If you are planning to avail a loan no matter if you opt for a business loan, car loan, home loan, or any other loan. Knowing your monthly payment is important to plan your finances accordingly.  

It is an auto-calculator online tool, and also a user-friendly device that can be used anytime and anywhere without the involvement of any third party. 

Easy Formula to Calculate EMI:  

P x R x (1+R)^N / [(1+R)^N-1] 

Where -  

P stands for Principal  

N stands for Loan Tenure  

R stands for Monthly Interest Rate 

Business Loan EMI Calculator with Example 

For example,  

If an individual avail a loan of Rs. 5,00,000 at an interest rate of 14.00% with a repayment tenure of 3 years. Then what will be the EMI? 

Principal amount = Rs. 5,00,000 

Rate of interest = @14.00% 

No. Of monthly installments = 36 Months or 3 years 

Types of Business Funding 

• Term Loan (Short term and long term)
• Working Capital Loan
• Bill Discounting
• Letter of Credit
• Merchant Cash Advance
• Overdraft Facility
• Equipment Finance
• Machinery Loan 
• Micro Loan
• Small Business Finance
• Farm/Construction Equipment Finance

Pros and Cons 

Business Loan Eligibility Criteria  

The eligibility criteria depend on numerous factors such as the age of the borrower, repayment history, creditworthiness, CIBIL score, business turnover and so on. 

• The age of the borrower should be between 25 years to 65 years of age.

• The business continuation should be a minimum of three years.

• Income Tax Return (ITR) must be filed for a minimum of last one year.

• The cash flow should be positive in the operations of the business organizations.

• The business or sales turnover should be audited by the registered Chartered Accountant.

• The borrower can avail a minimum loan amount of Rs. 1 lakh and the maximum of Rs. 5 crores as a loan amount.

• Any commercial loan, whether it is a microloan, term loan, working capital loan, bill discounting, equipment finance, letter of credit, or small business loan a tax-deductible is offered under tax benefits.

Documents required for a business loan 

These are the documents that are required while applying for a bank loan: -  

1. PAN Card – For Company/Firm/Individual

2. Documents as identity proof:(Copy of anyone) 

• Aadhaar Card
• Passport
• Voter's ID Card
• PAN Card
• Driving License

3. Documents as address proof:(Copy of anyone) 

• Aadhaar Card
• Passport
• Voter's ID Card
• Driving License

4. Bank statement for the last 6 months 

Latest ITR along with CA Certified computation of income, Balance Sheet, and Profit & Loss account for the previous 2 years. 

5. Proof of continuation (ITR/Trade license/Establishment/Sales Tax Certificate) 

6. Other Mandatory Documents. Copy of [Sole Prop. Declaration, Partnership Deed, Memorandum & Articles of Association.  
 

How to apply for a business loan? 

Financeseva allows the borrowers to select and compare the best deals offered by the top banks and financial bodies for a business loan.  

Step 1: - Visit the official website of the preferred bank & check your eligibility. 

Step 2: - With the help of the EMI calculator, you can evaluate your monthly payable EMIs.  

Step 3: - Thereafter, fill in the application form.  

Step 4: - Enter all the necessary information and choose the required loan amount and the repayment period. 

Step 5: - After filling in the application form, click on the ‘submit’ button.  

Step 6: - When you submit an application form the bank representative will analyze your application and get in touch with you for further formalities 

FAQs – Business Loan 

Who are eligible to get a business loan? 

Entities such as self-employed in both professionals and non-professionals, partnership firms, sole proprietorship, public and private limited companies, etc... are eligible to get a business loan.  

Is the interest rate fixed or floated? 

Basically, the rate of interest for a business loan is fixed not floated. 

How much will be the EMI?  

Equated Monthly Instalments (EMI) depend upon the loan amount. A business loan EMI calculator helps to you know the exact amount that you need to pay. 

What are the processing fee and rate of interest? 

The processing fee will be charged 2.5% of a loan amount and the rate of interest varies from 14% to 23%. 

Can I get a business loan without collateral? 

Yes, it is possible to get a business loan without collateral or security 

What are the different repayment methods? 

There are various methods for pay back the amount such as Electronic Clearance Service (ECS), post-dated cheque, or direct debit.  

What are the factors that should be considered while calculating the interest rate? 

Factors that should be considered while calculating the interest rate are -  

• Age
• Income
• Credit Scoring
• Outstanding liabilities
• Residence location, etc...

How will the funds be credited and how long does it take? 

The loan amount will directly be credited to the marked bank account within 5-7 working days of submitting the mentioned documents. 

Is the interest on a business loan is tax deductible? 

Yes, the interest paid on the loan amount for a business is tax-deductible as the tax authorities of India let the businessperson to avail tax benefits on business finance.  

Which bank is best for a business loan? 

• Kotak Mahindra Bank
• SBI (State Bank of India)
• Axis Bank
• IDFC First Bank
• Citi Bank
• TATA Capital
• IndusInd Bank