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Tax Benefits of SME Loans in India

Tax Benefits of SME Loans in India

SME loans are one of the most popular financing options for small and medium enterprises looking to expand operations, buy new machinery, hire staff, etc. However, can business owners avail tax benefits on such loans? Let’s find out.

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1. What is an SME Loan?

Small and Medium-Sized Enterprises (SME) are small-scale units wherein capital investment is in the range of Rs. 25 lakhs – 10 crores. Loans meant specifically to offer financial support to such businesses are known as SME loans or MSME loans. Typically, such loans are of two types – secured (collateral required) and unsecured (collateral not needed).

As per the Income Tax Act, 1961, a borrower is eligible for different types of tax benefits on loan repayments, SME loans or otherwise.

SME Apllication Form

2. Tax Benefits on SME Loans

A small business loan is availed to grow or expand a company. Because these involve a repayment tenure during which the business registers expenses (interest payments), income tax benefits are available to the borrower on such interest charges.

A businessman pays tax on their net income during a financial year; some expenses are subtracted from the gross income to arrive at the net income. The EMI paid on loan is one such expense, which can significantly reduce one’s taxable income. Before you apply for an SME loan, do check interest rates, processing fees, and other charges to evaluate the tax benefits of the loan. 

In India, the payment of interest on an SME loan is tax-deductible, an amount that is deducted from the business owner’s gross income to calculate the net income. To avail this benefit, you must maintain updated  and proper financial records for these payments to the lender.

Additional Read:- Guide for First-Time SME Loan Applicants

SME Tax Benefits

3. Is the Principal Tax-Deductible?

As opposed to the interest, the principal on an SME loan is not tax-deductible since it is just a borrowed amount and not income. Thus, in the case of small business loans, the repayment of the principal is not a tax-deductible entity but only a process of returning the borrowed money. 

Is the Principal Tax-Deductible

4. Applying for an SME Loan

Applying for a business loan is relatively easy in a time when technology is prevalent. One important thing to note here is that the loan must be repaid during a specified period. Thus, if you’re looking to take out an SME loan, be very sure of your requirements and the company’s financial situation. Once you’re confident an MSME loan is a great idea to expand your business, select a lender of your choice and apply for your loan through a simple online application process.

You can apply online or visit the nearest branch of the lender. Then, fill up your details in the application form and furnish the requested documents. Upon receiving your application, your details and documents will be verified after which the loan will be sanctioned. Shortly after approval, the loan money will be transferred to your bank account.

Applying for an SME Loan

Additional Read:- Top Things to Know About an SME Loan Agreement

Looking for a reliable SME loan lender? Contact Tata Capital! We understand the importance of SMEs to the Indian economy. This is why we make it easy for small businesses to get the financial support they need at the right time. Visit Tata Capital today and use our business loan EMI calculator to determine your eligibility and EMIs. Get in touch today!

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