Which Loans are Tax-Deductible?
In India, credit borrowers can avail a number of tax exemptions on different types of loans, like a home loan, education loan or a business loan.
However, most people are unaware that they can avail tax deduction on car loans as well. A car loan can help you save tax if you are a self-employed individual or a business owner. Let’s take a closer look at what are the benefits and exemptions available to Indian borrowers under the existing income tax laws.
Is Car Loan Eligible for Tax Deduction?
Owing a car has become a necessity in today’s world due to the practicality, convenience, and functionality it offers. Furthermore, applying for a car loan has become a hassle-free process, as most banks and financial institutions offer car loans today with many incentives, attractive interest rates, and nominal documentation.
Based on a person’s affordability, it has become very easy to avail a car loan and pay off the EMIs without dipping into your savings. Furthermore, self-employed individuals can deduct the interest amount paid on the car loan as a business expense and save tax on their net income. The depreciation on the car can also be claimed as an expense, irrespective of whether the vehicle is taken via a bank loan or with cash. The depreciation on the car can also be claimed at @15% per year, which can be deducted as a business expense from your net income.
Can a Self-Employed Get a Car Loan?
Banks and lenders have different conditions for offering car loans to self-employed individuals. Both secured and unsecured car loans require proof of income as a measure of creditworthiness of the borrower. Thus, it doesn’t matter if you are self-employed or salaried, if you meet the conditions set by the borrower, you can certainly get a car loan. The tax exemptions, however, vary for both these kinds of customers, as we have explained in the next section.
Benefits of Taking a Car Loan for Self-Employed Individuals
What’s important to note is that a salaried employee cannot claim tax benefits on car loan repayments as it is considered a luxury item. However, if you are a self-employed individual or a business owner, you can claim the interest paid on a car loan as a business expense. Self-employed individuals can avail car loans for vehicles which are used for commercial purposes under section 80C of the Income Tax Act.
This can help in reducing your taxable income by the amount of interest paid in a financial year. For example, if your income is Rs 10 lakhs in a year and you have paid an interest of Rs. 30, 000 on your car loan, then you can deduct the interest amount as a business expense. So, you will have to pay tax on only Rs 9, 70,000. Self-employed individuals can also claim tax benefits on the depreciation of the car as well as other expenses like fuel and maintenance. Additionally, making a down payment and available a car loan can give you a number of benefits as well.
Self-employed individuals can claim two kinds of car loans which are secured and unsecured. While the former is given by banks and require collateral and a high CIBIL score, the latter is offered by credit companies like PaySense without collateral or high credit scores.
The applicant can avail car loan as per their requirement, and it will be sanctioned without much hassle if all details and documents are complete. In most cases, proof of identity, address, and income is required. This is one of the reasons that car loans are becoming increasingly popular for self-employed individuals.
You can plan your car loan better by using the PaySense EMI calculator. It is a smart and simple tool which helps you calculate the monthly EMI amount payable, and check your budget in advance. You simply have to enter the principal amount, the duration of the loan and you will be offered all available repayment options.
Documents needed for applying for a car loan for self-employed individuals
The application process and documents needed to apply for a car loan vary from company-to-company. Since most banks offer secured car loans, they require their customers to submit the papers of the car as collateral as well. However, PaySense offers unsecured personal car loans to its customers and doesn’t ask for collateral or securities. Furthermore, you need not have a high credit score in order to get a loan from PaySense. Here is the eligibility and process to apply for an instant car loan from PaySense:
- The applicant must be a citizen of India and a resident in any of the cities that where we are present.
- The applicant must between the ages of 21 to 60 years.
- The applicant must have an active bank account.
- The applicant must have a stable salaried job or should be self-employed.
- Salaried applicants must have a minimum income of INR 12,000/month whereas self-employed applicants must have a minimum income of INR 15,000/month.
How a Self-Employed Can Apply for a Car Loan from PaySense
Step 1: Create a profile, select loan amount and repayment plan
Start the process by creating your profile using the PaySense personal loan app. Enter all required personal, income and contact information to get your credit line, which is the maximum amount you can borrow. Then choose the required loan amount and use the PaySense EMI calculator to select the best repayment plan.
Step 2: Upload KYC documents and sign the agreement
Upload your KYC documents using the mobile app to complete the application. You will also have to sign the loan agreement digitally and the NACH (National Automated Clearing House) form to allow auto-debit of EMIs from your bank account.
Step 3: Approval and disbursal of the loan amount
Upon successful verification, the loan will be approved within two working hours on the same day. Then, the loan amount will be credited to your bank account within the next 3-4 working days.
- Identity Proof: Aadhaar or PAN card
- Address Proof: Postpaid bill, rental agreement, utility bill or Aadhaar card
- Income Proof: Bank account statement for the last 3 months
- A selfie
How do I get tax benefit on a car loan?
To claim tax benefits on your car loan, you must use the car for business purposes. The IT assessing officer has the complete power to veto the deduction in case they find that the vehicle is not being used for business purposes. The car has to be registered in the name of the business or business owner.
To claim the tax benefits at the time of filing your returns, including the interest you paid during the year as part of your total business expenses, you will need to take an interest certificate from the lender to know how much interest you have paid in the financial year. This will help you in claiming tax deductions on your income.
Other things to remember while taking a car loan
Banks usually consider the type of vehicle you wish to buy, the loan tenure employment stability, CREDIT score, as well as any pre-existing EMIs on outstanding loans before approving your loan. On the other hand, upon taking an unsecured personal loan from PaySense, you are free to purchase any car model of your liking.
A high credit score can help you get a lower interest rate as well as a higher loan amount. As part of the due diligence, banks will also check your creditworthiness. If you have a pre-existing bank account with a bank, you may get special benefits like lower processing fee, waiver of income documents, and bank statements, etc. if you apply for a car loan from the same bank.
The CIBIL score is one of the most important factors that a bank considers to judge the repayment capacity of an individual. This is the single-most crucial factor that can lead to approval or rejection of your loan application. Financial institutions consider a CIBIL score of 750 and above as ideal, and chances of rejection of your loan application are reduced considerably if your credit score is higher. However, loans taken from PaySense do not require a high credit score. If you meet the eligibility conditions, you will be able to apply for a loan up to your credit line without any hassle.
Apart from this, remember only the interest amount paid on the car loan can be treated as a business expense and not the principal. If a car is being used for business as well as personal purpose, you can claim a portion of the interest as well as a depreciation cost in the ratio of the percentage of use for personal and business purpose. For example, if the car is being used for a business purpose 50% of the time and 50% for personal use, then only 50% of the interest amount can be claimed as a business expense.
Owing a car is no longer a luxury but has become a necessity for most individuals. Self-employed individuals can fulfil their dreams of owning a car with a new car loan or used car loan easily, as well as avail tax deductions on the interest they pay by using it for business purposes as well. Make sure you compare the interest rates and repayment conditions offered by different lenders before applying for a loan. The decision on which lender to choose will be based on these results. To make an informed choice regarding your car loan, always read the terms & conditions carefully. Now you know how to apply for a car loan with confidence, choose the best EMI plan and also the tax benefits that come with it.
Apply for Loans of upto ₹5 Lakhs easily using your phone or laptop, and pay back on low EMIs