Are personal loans tax deductible in South Africa?

If you’ve been granted a personal loan, you may wonder if you can claim a tax deduction.

This article explains when and how you can claim such deductions.

Tip: Work out your take-home pay with JustMoney’s salary tax calculator, and make informed financial decisions.

What does ‘tax deductible’ mean? 

Tax-deductible expenses are costs that reduce your taxable income, says Martin de Kock, a tax practitioner and director of Ascor Independent Wealth Managers.

However, it’s important to distinguish between business and personal expenses.

Section 11(a) of the Income Tax Act addresses the deduction of expenses related to trade or business operations and allows you to offset certain business costs against your taxable income, reducing the tax you owe.

For example, business owners can deduct costs related to earning income, such as operating expenses, but not capital expenses like equipment that lasts for years. These must be actual costs – not just planned expenses.

Why are some expenses tax deductible? 

Certain expenses are tax deductible to encourage behaviours that will benefit society and the economy, states De Kock.

For example, retirement funds are tax deductible up to certain limits – 27% of gross or taxable income, limited to a maximum contribution of R350,000 a year.

This encourages you to save for retirement, reducing the need to rely on a government social grant at a later stage. The deduction helps to lower your taxes and frees up cash.

Other examples of tax-deductible expenses include:

• Medical expenses exceeding a certain threshold. This reduces the actual cost of your medical care.
• Donations to approved public benefit organisations, limited to 10% of taxable income. Donating to a charity or non-profit organisation reduces your taxable income, resulting in less tax paid overall.
• Business-related expenses. Deductions for business-related costs such as your cell phone bill and travel reduce your taxable income and promote entrepreneurship.

Note that your medical aid contributions are not tax deductible, but that you can claim a tax credit for them. “The credits that are deductible monthly are R364 for an individual or R728 for a taxpayer and one dependent. For each additional dependent, the monthly credit is R246,” De Kock explains.

Are personal loans tax deductible?

There is some confusion about whether personal loans are tax deductible. The short answer is that while some types of loans, such as business and investment loans, offer tax deductions on interest paid, you can’t claim a tax deduction on any portion of a loan that doesn’t directly generate taxable income.

This means there are no tax benefits related to loans for private expenses, a private car, a personal home loan, or other non-business loans.

When can a loan be tax deductible? 

Loans used for income-generating purposes may qualify for tax deductions, which can help you to strategically reduce your tax burden.

However, when referring to loan repayments, it’s important to distinguish between the capital amount and the interest portion, advises Nicci Courtney-Clarke, head of tax at online tax platform, TaxTim.

“The capital portion of a personal loan will never be deductible for tax because it’s a capital expense,” she says. Only the interest portion may be deductible “if it’s incurred for business purposes in the production of income” – in other words, if it’s a business loan.

In summary: 

• The principal amount borrowed is not considered income
• Repaying a loan is not considered an expense
• Interest paid on personal loans for non-business expenses is not tax deductible

In general, the following types of loans can qualify for tax deductions.

Business loans

If you’re a salaried employee, you can’t claim tax deductions for a personal loan. However, if you’re running a business in your personal capacity, as a sole proprietor or freelancer, you may claim business expenses, notes Courtney-Clarke.

If you use a personal loan for business expenses, such as buying assets or funding business expenses like equipment or rental properties, the interest on the loan may be tax deductible.

Investment loans 

Loans for income-generating assets such as property or shares may offer tax benefits. However, De Kock cautions that if the shares generate tax-free dividends, the interest on the loan may not be deductible.

Using a personal loan for business can be beneficial, but only if other financing options aren’t available – for example, if you’re starting a new business without a credit history.

How to claim tax deductions on eligible loans

To claim a tax deduction, confirm the purpose of the loan – was it used to generate taxable income?

Gather your supporting documents to put in a claim, including:

• The loan agreement
• An invoice showing you bought income-generating assets or machinery
• Proof of interest paid (e.g., bank statements showing payments)
• A loan statement breaking down monthly payments into capital and interest
• Records showing the loan’s use for income-generating purposes

Courtney-Clarke stresses that you’ll have to prove to the South African Revenue Service (SARS) that the loan was used to generate income for your business. Failure to provide proper evidence could result in SARS rejecting your claim.

What cannot be claimed as a deduction?

As explained, you can’t claim tax deductions for loans that don’t directly generate taxable income.

Examples include:

• Loan capital repayments. Repaying the original loan amount isn’t considered an expense, so it’s not tax deductible.
• Personal loans for private expenses, such as general living costs, holidays, or weddings.
• Car loans for personal use. If your car doesn’t directly contribute to you earning taxable income (for example, if it’s used only for commuting), you can’t deduct the interest. If you use it for business, you can claim part of the interest.
• Credit card debt for personal purchases. Interest on credit card debt from buying personal items (such as groceries or clothes) isn’t deductible.
• Home loans for primary residences. Interest on your principal home loan isn’t deductible, though you may claim a portion if the home is rented out or used for business.
• Student loans. In South Africa, student loan interest is not tax deductible.
• Loans for tax-free investments, for example, interest on tax-free savings accounts.
• Refinanced or consolidated loans. Deductions do not apply if refinanced loans are used for personal expenses.

De Kock says you may be able to deduct interest on investment loans if the money is used to buy income-generating assets such as rental properties or shares.

However, since share dividends are often tax free, the interest on a loan for shares may not qualify for a deduction. It’s best to consult a tax specialist to check if your loan interest is deductible.

Practical tips for South African taxpayers

Here are some tips that will help you when tax season comes around again.

• Use the JustMoney salary tax calculator to estimate your tax liability and deductions, and expense-tracking apps to assist you with financial planning.
• Keep proof of loans used to finance income-generating assets for your business to qualify for interest deductions.
• Keep track of all interest payments and related expenses, especially if you have a business loan. File detailed records and documents to support your claims.
• Work with a tax professional to maximise your eligible deductions and avoid submission errors.
• Regularly review and update your financial and tax planning strategies to maximise deductions and reduce tax liability.

Tip: Find out if you qualify for a personal loan today.