You may need to take up a loan when you are purchasing a house, a car, expanding your business, or even for your higher studies.
While most people are afraid to take loans because they think that taking a loan means having to pay out a huge EMI every month; not many are aware of that fact that with some careful planning can they can reduce the burden of loans significantly.
We have answered some of the most common questions regarding how to claim tax benefits for different types of loans in India:
What types of loans are tax-deductible?
Most loans taken from banks and other official financial lenders are eligible for tax deductions in India. For instance, did you know that there are several tax rebates on different types of loans which can help you save money?
Most people wrongly assume that tax benefits are available only on home loans but that is not the case. Apart from a home loan, income tax rebates can be claimed on education loan, car loans, and even personal loans, depending on how the money is being utilised. According to the Income Tax Act, 1961, different types of loans come with different kinds of tax benefits.
How much tax deduction can I claim on home loans?
Home Loan is one of the most significant and biggest loans that you will ever incur in your life. It’s likely to be of high value and also last a few years. The Indian government has been promoting its ‘Housing for All’ scheme and has announced a number of subsidies and tax rebates that can help you save money when you purchase your dream home. In 2019 Union Budget, tax benefits of up to Rs 3.5 lakhs on home loan interests are now available for homebuyers under Section 80EEA.
However, these can only be claimed to purchase houses with a stamped value of up to Rs. 45 lakhs. Homebuyers can claim the benefits on home loans availed till 21st March 2020.
Under Section 80C, the home loan tax deductions can be availed up to a maximum of Rs. 1.5 lakhs from your taxable income on the principal repayment in a financial year. Under Section 24, maximum deductions of up to Rs. 2 lakhs on the interest amount payable can be claimed. These deductions can only be claimed on a property whose construction finished within five years of taking the loan. So, in total, you can claim the benefits of up to Rs. 3.5 lakhs.
Additionally, under Section 80EE, first-time homebuyers can also claim an additional amount of Rs. 50,000 on the payable interest every year for a home loan amount of up to Rs 35 lakhs, and property value of Rs. 50 lakhs. Both principal and the interest amount paid on home loans are eligible for tax deductions. Some conditions of availing tax rebates on your home loan include that the property is constructed and ready to move in.
In case you sell the home within 5 years of possession, the benefits will be reversed and added to your income. Lastly, if you have a home loan, and continue to live on a rented property, you can also claim tax benefits against HRA.
Do I get any tax benefit on education loans?
The rising cost of higher studies has led to an increase in the need for education loans. If you plan to go for higher education in India or abroad, you can take a loan for which you can claim a deduction under section 80E of the Income Tax Act 1961. Just to clarify, higher studies mean the education degrees undertaken after completing the Senior Secondary Examination (SSE).
It includes both vocational as well as regular courses in India or abroad. The loan amount can range from Rs 1 lakhs to Rs 20 lakhs, or even higher if needed. The amount has no upper limit, and tax benefit can be claimed on the total amount of interest paid, but this is not applicable to the principal amount.
Any individual who applies for an education loan for higher studies can claim a deduction of INR. 1, 50,000 under section 80C, as well as section 80E. Under Section 80C you can claim for deduction in respect of tuition fees paid for education, while under Section 80E you can claim a tax deduction for the interest on loan taken for higher education.
It is important to note that the tax deduction can be claimed only on the interest component of the education loan. The benefits can be claimed by the parent, legal guardian, spouse or even the child, whoever pays the education loan after the completion of studies. The deductions can be claimed only if the loan is taken to finance higher education. Furthermore, the maximum term for which deductions can be claimed is 8 years.
The tax deductions available under Section 80E apply only to education loans availed from banks, and financial institutions and organizations notified under the Income Tax Act. In other words, a tax deduction cannot be claimed on funds borrowed from family members or friends for pursuing higher studies.
Is there any tax exemption on a personal loan?
First off, let’s answer the question that ‘Do personal loans affect your tax return?’ There is a common myth that the amount taken as personal loans is considered as income. However, personal loans are treated at par with other loans and do not affect your tax return unless you plan to claim the benefits of interest payments. Thus, it is essential for you to understand the unsecured loan treatment in income tax laws to enjoy the benefits of the same.
Personal loans are generally used to manage any unexpected financial crunch; however, they usually come with a higher rate of interest, particularly unsecured personal loans. However, you can offset some of the cost by claiming the available tax deductibles in your income tax returns.
For example, personal loans taken for reconstructing or repairing a home are eligible for tax exemption. If you use a personal loan or credit card to make business expenses in addition to personal purchases then you may be able to claim reductions on the interest paid on those expenses as well. To avail the tax exemption, the person has to be legally liable for the loan and should be able to itemize the portion of the interest paid towards legitimate business expenses.
Similarly, if a personal loan is used to purchase a vehicle for business use, then the interest on the loan is tax-deductible. In case the vehicle is solely for business, then all of the interest is deductible. However, if the vehicle is for both personal and commercial use, then you can deduct the loan interest as per the amount of time the vehicle is used for business purposes.
For example, if you spend 60% of your driving time on business-related activities, then you can put 60% of the annual interest under tax exemption. Similarly, personal loans taken for a partnership or limited liability corporation (LLC) are also deductible under taxation laws.
Can we show car loan for tax deduction?
Cars or auto loan comes under the category of luxury items, and as such, no tax benefits are offered to customers who avail car or auto loan for the purchase of a vehicle.
However, car loans availed by self-employed individuals for vehicles that are used for commercial purposes are eligible for tax deduction under section 80C of the Income Tax Act.
When you take a car loan to purchase a vehicle for your business, the interest paid on the loan amount can be claimed as a business expense. So, borrowers can claim a tax deduction based on how much they use the vehicle for business purpose and how much for personal use. If the vehicle is only for commercial or business use, you can count the whole interest amount under tax deductibles.
Similarly, self-employed people can avail car loans if they are earning at least Rs 3 lakhs per annum. A salaried person has to be employed for at least two years to be eligible for a car loan. Apart from that, the fuel and maintenance cost of the vehicle is also tax-deductible.
What are the income tax laws for business loans?
A number of businesses take up loans in order to expand their companies. The minimum eligibility for applying for a business loan usually depends on the bank. The age of the person applying for a loan should be above 21 years, and the maximum age should be 65 years. Interest paid on business loans which are solely used for business purposes can be filed under tax-deductible income.
Tax-deductible expenses can be claimed at the time of filing returns. Interest on business finance tax is deductible, and a number of companies avail business loans to help save tax. The interest paid on the borrowed amount is subtracted from the gross income.
The repayment amount, however, is not tax-deductible. This is because principal repayment means to pay back the money borrowed, so it is an expense for the business and not an income.
However, you are advised to assess the situation carefully before taking up a business loan, as they usually have stricter terms and conditions as compared to other loans.
Thus, some of the popular loan types available in the Indian financial market come with considerable tax benefits as well. However, a lack of knowledge and awareness usually prevents individuals from making the most of these benefits.
By having in-depth knowledge about the various tax exemptions and benefits on offer, you can take a loan according to your requirement and reduce the financial burden of paying EMIs. So the next time you are considering taking a loan, make sure you spend some time to understand the technicalities associated with the same.
Research on how much money you can borrow, what would be the EMIs, what are the tax benefits and how much interest would you eventually end up paying. Since we are a developing nation, the Indian government encourages official sources of credit and encourages people to borrow money from banks and financial institutions as it helps stimulate the economy. So make sure you avail the maximum benefits of such policies while taking a loan.
Apply for Loans of upto ₹5 Lakhs easily using your phone or laptop, and pay back on low EMIs