All small, medium and large-scale businesses require capital to grow. Capital is required to buy machinery and equipment, raw materials, and to market products and services. Disruption in cash flows can shake up business. One of the most common options businesses employ to ensure adequate capital is a business loan.

A business loan is one of the most common forms of raising capital for companies. It is a loan taken by businesses to meet any sort of capital requirement. Business loans are easy to access and can be put to different uses. It can be used for increasing working capital, procuring fixed assets, consolidating debt, hiring new staff, etc.

Business loans can be either secured or unsecured. A secured loan will need the company or the entrepreneur to provide collateral to the lender, while an unsecured loan has no such requirement.

Typically, banks and non-banking finance companies (NBFCs) provide unsecured loans for smaller amounts after reviewing the cash flows of the business. These loans are sanctioned and disbursed in a short time. This makes these loans ideal for small businesses that require money quickly.

One of the reasons why businesses often consider taking business loans is the fact that such loans are tax efficient, which helps businesses as it reduces the strain on cash flows. Business Loans are considered to be for business expenses and are thus eligible for tax deductions in most cases.

Types of Business Loans That Are Tax-Deductible

Machinery loans, letter of credit, bill discounting, term loans, and merchant cash advances are all examples of business loans that provide borrowers with the option of tax deductions.

Borrowers can reduce their tax obligations using such loan facilities. The method used to get the loan is irrelevant. Therefore, borrowers securing business loans online or through credit cards are both deductible for tax purposes.

However, borrowers need to ensure that they take loans only from recognized lenders as loans from unrecognized or local moneylenders may not be applicable for tax benefits.

Parts of Business Loans That Are Tax-Deductible

When repaying business loans, there are two components which borrowers need to keep in mind. The principal amount of the loan is the amount that has been borrowed. The interest is a percentage amount of the principal which needs to be paid back for the facility of providing a loan.

The interest for the loan is the part which is considered a financial expense and is tax-deductible. If a borrower has taken a loan of Rs 30 lakh at an interest rate of 12% per annum for three years, Rs 30 lakh is the principal amount and will not be tax-deductible. At 12% interest, the interest component works out to Rs 3.89 lakh for three years. This means that that Rs 3.89 lakh will be tax-deductible out of the total amount repayable, which would come to Rs 33.89 lakh.

According to the Income-Tax Act, of 1961, only the net income of a business is taxable. Business loans bring about an inflow of cash. However, they are not considered to be part of the income of a company.

The interest on business loans is considered a business expense and thus would contribute to tax deductions.

Conclusion

Business loans are a vital tool a business can use to raise capital. One of the many benefits that business loans bring is that they are tax-deductible. The interest paid on a business loan is considered a business expense and is thus eligible for tax benefits. This ultimately means that the total amount paid on the loan is lower because of the tax benefits.

IIFL Finance offers a wide array of business loans at an affordable interest rate. The company’s business loans are tailored to ensure that they are at par with the best business loans in India. IIFL Finance offers both secured and unsecured loans for tenors as long as 10 years to help businesses meet their capital requirements.

For know more about Business Loans or apply for a Business Loan, visit IIFL Finance