When taking a loan, you should always consider the post-tax cost of the loan. There are many deductions allowed for interest payments and repayment of principal.
from
an accounting perspective, loans taken by you as a consumer
are liabilities. Hence, loans provide you with cash
flows to enable you to buy any product or use them for
whatever purpose you may desire, but do not impact your
income directly. You need to repay them as per your
agreement with the lender and at that time, the liability
reduces. Neither the receipt of the loan nor the repayment
of the loan are part of your income or expenses.
The
interest that you pay on the loan is an expense for
you. In computing your real savings, for your own understanding,
this interest expense will reduce your net savings.
The
Income Tax Act (the Act) does recognize some of the
interest expenses as deductibles while computing your
taxable income. Thus, in cases where the Act allows
you to claim such interest as expenses, your taxable
income will reduce and you will save on taxes. The Act,
as usual, is subject to various limits, and hence, you
may, depending on your case, avail tax deductions.
This
article seeks to explore this area of tax benefits available
to you in the context of loans and interest payments
thereon.
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