Let's quickly go through a few loans that have tax benefits that you should be aware of.
Tax Benefits on Different Loan Types in India
The following loans can assist you in receiving a tax benefit:
#1. Education Loans – Deduction under Section 80E
Nowadays, higher education is quite expensive, whether it is pursued domestically or abroad. In times of financial difficulty, an education loan obtained from a recognized source is useful. It can be used to pay for tuition, books, housing, travel, study materials, and other costs associated with education. The best thing is that you can request an exemption in accordance with Section 80E of the Income Tax Act of 1961.
- This deduction is available for interest paid on the education loan taken to finance the education of self, spouse or children. The deduction is available under Section 80E.
- The loan must be from an authorized financial institution for higher studies in India or abroad after completing senior secondary school.
- Tax deduction can be enjoyed either for the entire duration of loan repayment or up to 8 years, whichever is earlier
- The deduction allowed is the total interest part of the EMI paid during the financial year, not the principal amount.
- This deduction is in addition to the up to ₹ 1.50 lakh in deductions that a person may make for tuition fees paid under Section 80C.
- There is no defined limit of interest to claim tax benefits.
Tushar is a regular salaried IT executive living in Mumbai with his family. His 19-year-old son, Arun is ready to pursue engineering from one of the reputed colleges in the country. Tushar took an education loan of ₹ 10 lakh to fund Arun’s college fees for 4 years. Arun is comfortably studying in his college with a secured career to look forward to. Tushar has taken the loan for a period of 6 years, and in this duration, he can claim a deduction of Interest paid on the loan taken for higher education under Section 80E.
#2. Home Loans – Tax Deductions under Section 80C, Section 24, Section 80EE, Section 80EEA, and CLSS
It’s no brainer that a home loan can help both self-employed and salaried individuals fulfil their dreams of owning a house. But did you know the loan can potentially lower your tax liability? Yes, it can.
The tax sops offered by the government can lessen the financial burden considerably for home buyers. The Income Tax Act of India allows exemptions on both the interest and principal component.
As per the amendment of the rules of income tax act , starting April 2022, no new home loan sanctioned in FY 2023 will be Eligible to claim tax benefits under section 80 EEA, seeing as the tax benefit period has lapsed.
Following deductions are available for the Home Loans subject to fulfilling the conditions as specified in the Income Tax Act, 1961:
|Sections In Which Deduction Is Claimed||Amount Of Loan On Which Deduction is Claimed||Maximum Amount Deduction|
Section 80 C
Section 80 EE
Additional Interest Tax Benefits For First Time Home Buyers
Section 80 EEA
- Tax Deduction under Section 80C – You can claim up to ₹1.5 lakhs on the principal repayment of your home loan as per Section 80C. However, this deduction is applicable only when the construction is complete on the property, not when it is being constructed.
- This may include stamp duty and registration charges as well, but can be claimed only once and in same year that they are incurred
- If a joint loan has been taken, each is eligible to claim deduction on interest paid up to ₹2 lakhs each. Moreover, each is also eligible to claim 80C deduction on the principal amount for ₹1.5 lakhs each.
- Tax Deduction under Section 24 – You can claim a tax deduction of ₹2 lakhs on the interest paid for the home loan, in the case of a self-occupied property. In case the property has been let-out on rent, there is no limit to the deduction that can be claimed on the interest paid.
- These deductions apply only on the property whose construction finished within 5 years. If does not finish within the time frame, you can claim only up to 30000.
- Individuals may claim tax deductions under Section 24(b) up to a maximum of ₹ 30,000 per fiscal year for home loans taken out for the purpose of renovating or repairing an existing residential property.
- Tax Deduction under Section 80EE & 80EEA – First-time home purchasers are the focus of this section. Homebuyers have two choices for claiming deductions under Section 80EE:
Section 80 EE - Section 80EE allows Income Tax Benefit on Interest on Home Loan to first time buyers in the following events:
- This deduction will be provided only if the cost of the property acquired is not more than Rs. 50 Lakhs and the amount of the loan taken is upto Rs. 35 Lakhs.
- The loan should be sanctioned between 1st April 2016 and 31st March 2017.
- The advantage of this deduction would be possible till the time the payment of the loan continues.
- This deduction would be accessible from the financial year 2016-17 and onwards.
Section 80 EEA -Under this provision, you can claim a deduction for the interest you pay on your housing loan. If the loan had been taken out, it should have been used for acquisition of a Residential House. This section does not cover the construction of a Residential House. This section allows you to deduct up to Rs 1,50,000 per financial year
- Eligibility Criteria - Only Individuals are eligible for the deduction under this section. HUFs, AOPs, partnership firms, companies, or any other type of taxpayer cannot claim benefits from this section.
- Deduction amount of Section 80 EEA - Under Section 80EEA, tax deductions for interest payments are available up to a limit of Rs 1,50,000. This is in addition to the deduction of Rs 2 lakh allowed under Section 24(b) of the Income Tax Act.
Therefore, taxpayers who meet the conditions of section 80EEA may claim a deduction of Rs 3.5 lakhs for interest on home loans.
- Credit Linked Subsidy Scheme (CLSS) – It is a Central Sector Scheme. Interest subvention on home loan taken by eligible urban poor (EWS/LIG) for acquisitions construction or enactments of house. For the first time, Middle Income Group (MIG) has been included for a housing scheme in the country. First-time homeowners are eligible for a tax discount of up to ₹ 2.67 lakhs under the Pradhan Mantri Awas Yojana.
#3. Personal Loans – Indirect Deductions as Per Use of the Loan
When a personal loan is used to invest in your business, the interest paid can be claimed as a business expense, which can reduce your taxable income.
A personal loan used to buy shares, jewellery or non-residential property can also provide tax benefits since the interest paid adds to the acquisition cost. This leads to reduced capital gains tax upon sale.
People who have taken out personal loans from banks or other financial institutions may also be eligible for tax advantages and deductions on the interest payments made toward the principal amount of their loans. However, the principle of the loan cannot be used to offset these deductions. Personal loan tax deductions are only allowed in the following circumstances:
- Invest In business -> If the personal loan amount has been invested in business, the interest paid can be claimed as an expense. This will bring down the tax liability of the borrower and reduce the net taxable profits of the business that they have invested in. There is no cap on the amount that can be claimed in this case.
- Investment for the Purchase/Construction of a Residential Property-> One can avail tax benefits from their personal loan if they have used the personal loan money for the purchase or construction of a residential property. The borrower can avail tax benefits for repayment of interest for the same under Section 24 of the Income Tax Act, 1961. There is no cap on the maximum amount that can be claimed if the house has been rented out to someone else. However maximum loss that can be claimed under the head House Property is Rs. 2,00,000. It is important that the borrower be the owner of the property in order to avail tax benefits.
- Under section 24(b) of the Income Tax Act, tax deductions on the interest paid may be made if the personal loan amount is used to finance a down payment on a home or renovations.
- The interest paid raises the cost of acquisition when borrowed funds are used for commercial endeavors or the purchase of assets. Because of this, the capital gains are lower, which lowers the tax bill.
#4. Car Loans – Tax Deductions under Section 43B and Section 32
Even the interest you pay on your car loan is deductible from taxes if you are a self-employed professional or businessperson.
The interest paid on the car loan must be claimed as a deductible expenditure under Section 43B of the Income Tax Act in order to qualify for this. The loan must also be recorded in the financial records of the business or profession. Therefore, make it a point to request the interest certificate for the car loan from your bank. For example, if your income from a profession or business is Rs. 30 lakh and you pay Rs. 1.80 lakh in car loan interest throughout the fiscal year, you can deduct that amount from your income. Remember that only the loan's interest payments—not the principle part of the EMIs—are tax deductible expenses.
Additionally, the depreciation benefit provided by Section 32 of the Income Tax Act may be used, which will further lower the taxable profits. If you purchase the automobile and its used in the business for more than 182 days, you may deduct up to 15% of the purchase price as depreciation. However, in case you use the asset for less than 182 days, you may only deduct 7.5% of the cost of a car.
Nevertheless, the decision to give the tax benefit is at the decision of the Income Tax Assessing Officer (AO). The deductions might not be allowed if AO thinks the car wasn't used for the purpose of business or profession.
As you can see, the aforementioned four loans offer tax benefits in addition to providing cash flow when a financial problems occur. It's crucial to keep in mind, though, that obtaining a loan of any kind is a big commitment that should not be treated lightly. After all, it's borrowed money that needs to be paid back.