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written by | May 2, 2022

Definition, Types, and Advantages of Lines of Credit

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When the government introduced the Goods and Services Tax, it included many state-level taxes, such as Value-Added Tax and service tax, in indirect taxation. The introduction of the Goods and Services Tax, one of India's largest tax reforms, simplifies the tax plan and improves its logistics and conformities without any specific problems. One of the contentious issues is the input tax line of credit loan repayment. This post will evaluate how to recover an input tax of this line of credit and how you can manage your tax liability in the circumstances that lead to further generation.

Did you know?

A LOC is an agreement between a bank and a customer defining the maximum amount of loan a customer can borrow.

Also Read: Government extends Emergency Credit Line Guarantee Scheme till March 31, 2022

What is a Line of Credit?

An input tax of line credit is a refund of the tax paid on inputs, ultimately generating the final multiplier responsible for the GST Registration. The legislative and economic purpose behind the introduction of the Goods and Services Tax was to eliminate the dual taxation - also known as the tax effect, which ensures that the loan obtained during the refund is taxed twice in the same item. Suppose a company manufactures a laptop in India. Assuming the value of the raw materials used for production is ₹100, a GST of 20% will be levied on it. Therefore, the input tax for receiving goods will be ₹120. Assuming the company sells this laptop in India for ₹120, the GST rate is 5%, so the laptop buyer pays tax at ₹6 (i.e., 5% tax on ₹120).

Different Types of Lines of Credit

Different types of instant line of credit online can generally be classified as

1) Secured and unsecured debt

2) Private and public debt

3) Board and dual debt

4) Other types of credit exhibit one or more of the above characteristics.

Mortgages, auto loans, payday loans, student loans, marriage loans, home equity line of credit loans, business loans, etc. They are each defined for a specific reason so that they may differ in the period, interest rate and fee payable. These are the different types of lines of credit.

How Does the Personal Line of Credit Work?

There is no direct provision in the Income Tax Act for an income tax deduction regarding the personal line of credit work. However, this does not mean that a personal line of credit is not tax-deductible. This personal line of credit can also be tax-deductible if the individual took out a loan for a business purpose, construction of a property or property purchase.

Loan Purchased to Invest in the Business.

If an individual borrows the money and invests in the business, you can show interest in it as an expense and get an income tax deduction for it. It will also indirectly increase the profit earned through the business. The best part about this is that there is no maximum limit, which means that no matter how much interest there is, you can claim it as a cost and claim a tax deduction.

Loan to Buy a House to Repair

There are two major types of home equity loans, interest and principal. You can get a tax deduction if you have a personal line credit or buy a residential property to repair a house. Interest is tax-deductible under Section 24 of the Income Tax Act. If you live in that house, you can get a tax deduction of up to ₹2 lakh. If the house is rented out, you cannot limit how much tax deduction you can claim. The line of credit provides the best provision of funds which, in a way, is very much helpful to you in all aspects.

Also Read: What are the Different Types of Loans in India?

A Personal Line of Credit Obtained to Purchase Property

This can also be tax-deductible if you purchased gold jewellery, movable property or invested in stocks. However, the tax deduction is not available in the year the interest is paid, and tax exemption will be given in the year the property is sold. Read all the terms and conditions of the document before registering for the line of credit, and this is very helpful in getting the perfect loan for your house. 

Difference Between a Personal Loan and a Personal Line of Credit

Personal loan

These are unsecured loans that provide you with a fixed amount of funding distributed in a single lump sum. They are often only used for one-time purchases, such as groceries. Because they have set interest rates and a predetermined payback time frame for this loan, your payments on a private loan of credit would be the same every month of this personal loan during the life of the loan. It is possible to obtain a personal loan of credit from a financial institution such as a bank, credit union or online lender. It is most frequently employed in the reduction of credit card debt.

Personal Lines of Credit

It is similar to a credit card in that it is an unsecured revolving credit line with a credit line limit and a variable interest rate. In the case of this personal line of credit, if you are attempting to manage your purchases but are unsure of the full scope of the fees associated with this form of a line of credit, a personal line of credit may be an excellent answer for this type of credit. While the number of your payments on a personal line of credit will fluctuate due to variable interest rates, you will only be charged interest on the portion of the credit line that you utilise. It may be available through your local bank or through one of the many online lenders who offer this type of personal line of credit.

Advantages of Personal Line of Credit

Loans with a high borrowing limit and low-interest rates are available, making them more cost-effective and convenient. Long-term project costs, short-term cash shortages and emergencies are the best uses for this product. A personal line of credit assists you in better arranging your finances because you'll only have borrowed the amount you need.

Disadvantages of Personal Line of Credit

It has annual fees, and it isn't ideal for consolidating debt because it requires a high credit score. It is the danger of overspending because of the ease with which one may borrow the money. A personal line of credit's drawbacks includes the difficulty of keeping track of multiple withdrawals, leading to a chaotic financial position.

Conclusion

As with any financial product, there is no inherent good or bad in personal lines of credit. It all comes down to how one uses it—as with a personal credit card, overborrowing against a line of credit loan might put a person in the same financial predicament. When a financial institution lends money to its customers, the amount they can borrow is limited by the terms of the Letter of Credit (LOC) arrangement. The borrower has unlimited access to the credit line if they do not go over the agreed-upon maximum amount (or credit limit).
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What exactly is the risk associated with applying for a line of credit?

Ans:

Personal lines of credit, such as credit cards and other kinds of revolving credit, can negatively influence your credit score if you carry a large balance, typically 30% or more of your established line of credit limit for an extended period.

Q: What are the prerequisites for obtaining a line of credit, exactly?

Ans:

A line of credit loan is similar to a standard loan in that it demands good credit and prompt return of the cash borrowed and charging interest on any monies borrowed. A line of credit, like a loan, can help a borrower's credit score by allowing them to borrow money, use it and then pay it back.

Q: When is it appropriate to use an instant line of credit online?

Ans:

Getting a home equity loan or secured line of credit loan may be a smart choice if you need money for a large price, such as a home renovation project, college tuition or other major expenses. However, you must ensure that you have the money to repay the loan. The interest you pay on your HELOC may be deducted from your taxable income.

Q: What is the line of credit, and how does it work in practice?

Ans:

You can borrow money when you need it, up to a predetermined borrowing limit, by writing cheques or making purchases or cash withdrawals with a bank card. A Line of Credit loan (LOC) is a checking account that allows you to borrow money up to a certain borrowing limit when you need it.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.