Author
LoansJagat Team
Read Time
4 Min
27 Jun 2025
Sakshi runs a printing company. She had taken a ₹35 lakh loan at 17% annual interest. After 18 months, the business still owed ₹24 lakh. Sakshi decided to refinance this with another lender. Another lender provided her an interest rate of 11.5% annually.
She was able to reduce the company’s monthly outgo by ₹8,200. More importantly, she was able to save over ₹2.75 lakh yearly in interest. It was deducted as a business expense. Hence, reducing the taxable profit.
Many business owners, like Sakshi, rely on loans to fund their business needs. But as time passes, the original terms of the business loan may no longer suit your needs. That’s when refinancing becomes an option worth exploring.
It means you take a new loan to repay your existing loan. This may be done to:
Usually, you do it to reduce costs or improve cash flow. But it also opens up opportunities for you to manage taxes better.
When you refinance your business loan, your new interest payments and related expenses are still eligible for tax deductions. But you must use funds strictly for business operations only.
If you are paying interest on a business loan, even a refinanced one, it qualifies as a business expense.
Loan Amount | Interest Rate | Annual Interest | Deductible Under Income Tax |
₹30,00,000 | 14% | ₹4,20,000 | Yes |
After Refinancing | 10.5% | ₹3,15,000 | Yes |
Difference | - | ₹1,05,000 | Also Deductible |
Even your reduced interest is also fully eligible for deduction.
When you refinance your loan there are additional charges like:
These are also deductible in the year they are incurred. You can show these as operating expenses in your profit and loss account.
Expense Type | Cost (₹) | Can You Claim It? |
Prepayment Charges | 25,000 | Yes |
Processing Fee (New Loan) | 18,000 | Yes |
Valuation & Legal Fee | 7,500 | Yes |
Total | 50,500 | Yes |
Current Rate | New Rate | EMI Saving | Refinance? |
16% | 11% | ₹7,500+ | Yes |
14% | 12.5% | ₹3,000 | Worth Checking |
12% | 11.5% | ₹900 | Not Ideal |
You should avoid mixing personal and business use as it may disqualify the deductions.
Keep the following documents ready:
These are necessary during your income tax assessments.
You should include all one-time fees under business expenses in the correct financial year.
If you are dealing with NBFCs or private lenders then remember to deduct TDS on interest payments to avoid disallowance.
Umesh has a business loan of ₹20 lakh. He refinanced it from 16% to 11% for a term of 3 years.
Particulars | Amount (₹) |
Interest (Old Rate) | ₹3,20,000 per year |
Interest (New Rate) | ₹2,20,000 per year |
Annual Savings | ₹1,00,000 |
3-Year Savings | ₹3,00,000 |
Tax Benefit (25%) | ₹75,000 |
You can see that by simply switching to a lower-cost loan, Umesh saved ₹75,000 in taxes over three years.
If you are planning to refinance your business loan then you must know that it can go beyond just saving interest. If you use it wisely, it can become a strong strategic tool to:
With interest and related charges fully deductible, and a lower EMI improving your working capital, refinancing can offer both immediate and long-term benefits.
You should always maintain financial clarity. If you are not sure about how to account for refinancing-related costs then you must consult a tax expert.
1. Do I need CA help to claim these deductions?
It’s advisable to avoid errors in accounting and compliance.
2. Will frequent refinancing affect my credit score?
Yes, it may impact your profile negatively.
3. Can startups also refinance loans?
Yes, if their credit profile meets lender conditions.
4. Can I claim a deduction on principal repayment?
No, only the interest and fees are allowed.
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LoansJagat Team
We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?
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