You may be curious whether you must pay taxes on personal loans you received. Generally, a personal loan is not treated as “income” and is not taxable.
However, in terms of “Tax Treatment of Benefits Relating to Loans” from IRAS, there are some instances where a “personal loan” is taxable:
- When an employer or employee obtains a loan from a financial institution and the employer pays the interest payment, the loan is taxable.
- For interest benefits on loans to company directors, IRAS has the right to tax this.
- Waiver of principal sum – The amount waived is taxable by IRAS
With regards to personal loans between employers and employees, for example, tax treatment of interest-free loans, subsidized interest loans, waivers on the principal sum, etc. given to employees, please refer to this IRAS page for details.
What is a personal loan?
A personal loan is the sum of money you received in the form of a loan or debt, this can be an interest-free loan from your family and friends or an interest-bearing loan from financial institutions.
You are free to use this loan for any emergency or unforeseen circumstances. Usually, personal loans in smaller amounts (relative to the borrower’s assets and monthly income)are provided on an unsecured basis, where there is no need to put up any collateral.
You can apply for a personal loan through a bank or a licensed moneylender. Once you have one, you must pay the lender timely each month. This includes the total amount owing, principal, interest, etc.
Are personal loans considered income?
In accounting terms, income is defined as revenue a company makes from providing its goods and/or services or the money a person derives as compensation in return for his or her labor, services, or investments.
Based on this definition from an accounting perspective, a personal loan granted to you is not considered an “income” and is generally not taxable.
The word “income” refers to money someone earns through work. Compared to a loan, you don’t make money from a loan; you get one and you have to pay it back.
With that, including the amount of your personal loan on your tax return is generally unnecessary. Since personal loans are generally considered non-taxable.
Always check with IRAS on this matter if you are unsure.
To sum everything up
In most cases, personal loans are not taxable. Even so, there are circumstances where you can be required to pay taxes on forgiven payments. Check with a professional tax advisor on this matter.
When you take a personal loan from a bank or a licensed money lender, this income is generally not taxable.