What Are Tax Benefits on Gold Loan

In the world of personal finance, gold has always held a special allure. Beyond its aesthetic appeal and historical significance, gold has been a store of value and a hedge against inflation for centuries. However, in modern times, gold has also become a valuable asset that can be leveraged to access funds through gold loans.In times of urgent financial need, opting for a Gold Loan backed by your gold holdings can offer a straightforward solution. Lenders typically provide loans to individuals owning gold of 18-24 carats, granting amounts ranging from 75-90% of the gold's market value. The interest rates on Gold Loans vary from 10-24%, depending on the borrower's creditworthiness. This type of borrowing simplifies the process of accessing funds quickly, allowing individuals to leverage the value of their gold assets effectively. What's more, these loans come with certain tax benefits that often go unnoticed. Let's delve into the world of gold loan tax benefits to understand how they can be advantageous for borrowers.

Tax Benefits on a Gold Loan?

Unlike loans like home loans, tax benefits on gold loans are based on how you utilize the funds. Under Section 80C, you can claim tax deduction up to Rs. 1.5 Lakh for home improvement loan principal. Section 24 allows up to Rs. 2 Lakh deduction for interest on property purchase or construction, either self-occupied or rented. Using gold loan funds for business expenses allows treating interest as a business expense, reducing taxable income. Purchasing assets with a gold loan reduces capital gains tax by including interest as acquisition cost. Gold loan amounts aren't taxable income. Besides tax benefits, gold loans offer various advantages.

Deduction on Repayment of Principal Amount of Home Loan under Section 80C

When utilizing a Gold Loan to finance house purchase or construction, borrowers can claim up to Rs. 1.5 Lakh deduction on principal repayment under Section 80C of the Income Tax Act, 1961, applicable solely under the Old Tax Regime. In the case of a joint gold loan, both borrowers can each claim up to Rs. 1.5 Lakh deduction, provided the limit isn't exhausted by other expenses or investments. Similarly, if the gold loan is for significant house repairs, borrowers remain eligible for a deduction on the principal repayment, also up to Rs. 1.5 Lakh under Section 80C.

Deduction of Interest Paid on Gold Loans towards Purchase of House under Section 24

In certain situations, traditional home loans may not fully meet the diverse financial needs associated with buying or building a residential property. In such instances, leveraging a gold loan can effectively bridge the financial gap. What's more, borrowers can also benefit from tax deductions on the interest component of such gold loans in the same fiscal year.

Under Section 24 of the Income Tax Act, borrowers of gold loans can claim interest paid on loans taken for purchasing or constructing their house. For self-occupied houses, the deduction limit for interest on gold loans is up to Rs. 2 lakh. In the case of a joint gold loan, both co-borrowers can claim up to Rs. 2 lakh each towards interest payment. If the house is rented out, the interest paid on the gold loan is considered an expense, enabling the borrower to claim the entire interest amount as a deduction under Section 24.

Deduction towards Interest Paid under Section 80EE

Borrowers of gold loans can claim an additional deduction for interest paid under Section 80EE of the Income Tax Act, beyond the Rs. 2 lakh limit specified in Section 24. This deduction, capped at Rs. 50,000, is solely for the interest component of the loan. To qualify, the loan amount must not exceed Rs. 35 lakh.

Furthermore, the 2019 budget introduced an extra deduction under Section 80EEA, extending tax benefits for interest paid on loan repayment up to Rs. 1.50 lakh. This deduction is specifically for loans taken for affordable housing by first-time homebuyers, provided they are ineligible for the deduction under Section 80EE.

Deduction of Interest amount as Cost of Acquisition

If a borrower uses a gold loan to purchase assets such as equity or bonds, the interest paid on the loan can be claimed as a cost of acquisition. This deduction reduces taxable capital gains, thereby lowering the tax liability. However, the deduction can only be claimed in the year when the assets acquired using the gold loan are sold. For instance, if bonds acquired in 2015 are sold in 2023, the interest paid as acquisition cost can only be claimed in the financial year 2022-23 and assessment year 2023-24.

So far, we've discussed tax benefits applicable to individuals. However, there's another tax benefit available for gold loans utilized for business purposes.

Deduction of Interest amount as Business Expenses

Entrepreneurs can leverage gold loans to manage various business expenses. Using the loan proceeds for business purposes allows borrowers to treat the interest amount as a deductible business expense. By reducing the taxable income attributable to the business, this approach can effectively lower the overall tax liability.

Features and Benefits of a Gold Loan

Gold loans offer several advantages:

Instant accessibility: There are a lot of digital lenders that provide quick access to funds, often within 30 minutes, through doorstep loan services. This ensures timely financial assistance to meet urgent needs, enhancing financial flexibility and security.

Considerable LTV: Gold loans offer high loan-to-value ratios, enabling access to a significant portion of gold's value. This allows borrowers to leverage their gold assets effectively, maximizing financial resources for various purposes.

Iron-clad security measures: Reputed lenders implement stringent security measures to safeguard pledged gold assets. This ensures the safety and integrity of borrowers' valuable possessions, instilling confidence and trust in the lending process.

Nominal interest rates: Gold loans typically come with lower interest rates, easing financial burdens for borrowers. This makes gold loans an attractive financing option compared to other forms of credit, providing cost-effective solutions for diverse financial needs.

Various repayment schemes: Borrowers can choose from different repayment options, such as interest-only EMIs or bullet payments, based on their financial preferences. This flexibility allows borrowers to tailor their repayment plans to suit their individual circumstances, enhancing affordability and convenience.
 

Conclusion

Exploring tax benefits on gold loans enhances financial planning strategies, empowering individuals to make informed borrowing decisions. By understanding the available deductions and leveraging the features of gold loans, borrowers can optimize their tax liabilities and financial outcomes effectively.