Everything about NRI Personal Loan, Tax Deduction, and Repayment Options

All about NRI

Most banks offer foreign currency or rupee loans to NRE or FCNR term deposit account-holders. These loans are granted against the sum in the NRE or FCNR account at reasonable interest rates. Loans granted can be up to 90% of the sum in the term deposit account, the upper limit on loan amounts varying from one bank to another. Rates of interest are competitive. Loans can be available for different purposes. The funding is available for considerably high limits. Repayment tenures vary from 12 months to 60 months.

Advantages of NRI Personal Loans

Documentation and process of application are easy.
Applications get processed quickly and without a hassle.
A large number of banks offer personal loans to NRIs.
The loan is available for both salaried and self-employed people.
Financing for personal credit requirements is easy.

Documentation needed for NRI Personal Loan

The documentation needed varies from one bank to another and also from one applicant to another. Just like an instant cash loan, which is meant for salaried individuals living in India, the documentation for NRI traditional personal loan is minimal.

General documents needed for personal loans in case of NRIs

Copy of Passport and Visa
Domestic and International Bank Statements
Salary Certificate in English
Power of Attorney with local attestation, if the application is being made from India; It should be attested from an Indian Consulate if the application is being made from a foreign country
Those working in the Middle East, in merchant navy, or under some specified employers might need to produce additional proof like labour card or CDC.

Indian Banks offers Unsecured or Secured Personal Loans to NRIs are

State Bank of India
Canara Bank
Federal Bank
Standard Chartered Bank
Citibank
Axis Bank
ICICI Bank

Tax Benefit on Personal Loan

If you wish to enjoy tax deductions, then use the personal loan for your house. Relief is provided to home buyers by Section 24 (b) of the IT Act, thus providing them tax deductions on personal loans that have been taken to renovate or acquire a residential property. You would be able to claim tax exemption, if you utilize the personal loan amount for making the down payment needed in the purchase of your house. Home renovation, repair, or reconstruction is also valid grounds for tax deductions.

Although you cannot enjoy deduction on the principal loan amount, you can claim tax deduction on the interest you pay on the loan. If you reside in the residential property on which you will spend the loan amount, you can avail tax deduction on the interest up to Rs 1,50,000. There is no upper limit on the interest amount, if the house has been rented.

If you have bought an under-construction house, you are not allowed to claim deduction until the construction is complete. The house needs to be ready for occupation within 3 years of getting the loan.
It is advisable to maintain all documents required to furnish proof that the personal loan amount has been used on your house.
You must keep all details and bills for labour and materials, if the loan amount has been used for renovations and repairs. These are necessary for claiming tax deductions.

NRIs can take personal loans from major Indian banks. Generally, public sector banks provide NRI customers with personal loans against fixed deposits. Private sector banks offer unsecured personal loans to NRIs. Personal loan is a sensible option for NRIs who need financing for various requirements, as quick as possible.

Prepayment and Part-payment on Personal Loan

Early repayment or prepayment of a personal loan is a payment that the borrower makes towards their loan prior to the maturity of the loan tenure. The lending bank cannot stop a borrower from making prepayments. However, a penalty can be charged for prepayment. Prepayment is usually a large amount.

2 ways in which Personal Loan Part Payment can be made are

Paying the loan by part
Paying off the entire loan

When Should a Borrower Decide to Pre-Pay their Personal Loan?

Prepayment, whether in part or in full, is a sensible option when:

The borrower has a large amount of money and the financial ability to settle the loan amount in full, or part, without hampering their budget.
The borrower can save on the rate of interest charged, if the tenure is a longer one. Prepayment results in lowering of the EMI or reduction in the tenure with the same EMI.

Part Payment of Personal Loan

You can opt for part payment of your personal loan, when you have some excess money at your disposal but not the sufficient amount to pay back the total principal outstanding amount. However, it is only sensible to go for part prepayment if you can pay back a significant lump sum of money. Some lending banks enable you to pay 2 to 5 times of the EMI value at least once every 12 months or more. It is, however, advisable that you make sure your lending bank offers this facility.

Penalty

NBFCs and banks generate profits from the rate of interest charged on personal loans throughout the total loan duration. Longer the duration, higher is the rate of interest charged and hence larger is the profit. When you decide to make a prepayment or part payment, the outstanding loan amount reduces, thereby affecting the profit earned by the lending bank. Thus, banks charge a certain percentage of the amount repaid with the objective of compensating for the loss in profit.

Part prepayment can usually bring in a penalty of either a percentage of the principal loan amount or a percentage of the prepaid amount.
You can opt for a personal loan which happens to be an unsecured loan, when you are in need of funds but do not have security or property to guarantee the amount.
Usually, a personal loan is non-taxable and income tax benefits can be claimed on Personal Loans if the loan amount is used to buy, take lease, construct, reconstruct or repair a property.
As a loan is not considered to be a part of your earning, personal loans are also not considered to be taxable funds when you file your IT return. You won’t need to pay taxes on a personal loan
However, you must take the loan from a valid lender like a bank or financial institution as a loan from an unknown source might be treated as your income when your taxes are computed.

In some cases, tax benefits can be actually claimed on a personal loan. Irrespective of the source of loan, you can claim tax deductions on the interest you pay on the loan and can use a personal loan as a tax-saving tool.

To Conclude

A personal loan for NRI is feasible for funding emergency and immediate needs. You can even avail tax deductions on the borrowing facility, if used for purchasing a residential property. There is a way to reduce the burden of interest payout through prepayment or part payment. Keep in mind the charges of prepayment and part payment before opting for any of these options.