3 Loans That Can Give You Great Income Tax Benefits

by Bhavna S. Financial Advisor

Loans are your friends in need, but taking a loan also means that you take a regular liability on your monthly income. EMIs on home loans and auto loans form a considerable share of a households expenses. It always helps to take loans in a manner that you get low interest rates and take advantage of available tax benefits on these loans to further their interest cost.

Home Loans are eligible for tax deductions under various provisions of Income Tax Act. While there are no similar tax exemptions on other loans such as personal loan or car loan, many of these loans can allow you to save income tax based on the purpose for which they are used. In this blog, we have highlighted the tax benefits that one can avail on popular loans like home loans, personal loans or car loans.

Tax Benefits on Home Loans:

A home loan is the amount borrowed by the individuals from financial institutions or banks to construct, buy or repair a residential property. Lenders provide the loan for a fixed tenure and charge interest on the amount borrowed, which has to be paid by the borrowers along with the principal amount. However, You are allowed to claim interest rate deduction both on interest paid and principal amount of the loan under Section 24 and Section 80C respectively of Income Tax Act.

Section 80C: Under Section 80C of the Income Tax Act, you can avail Home Loan tax benefits on annual principal repaid amount on your home loan. Maximum annual tax deduction allowed is Rs. 1.5 lakh. The tax deduction limit under Section 80 C is higher for senior citizens at Rs 2 lakh. The amount paid towards stamp duty charges and registration fees can also be counted for deduction under section 80C. However, please remember that you can claim tax benefit for repayment of principal loan amount under Section 80C only after the construction of your house is complete.

Section 24:a)Self-occupied house:As per Section 24 of the Income Act, you can claim a deduction of up to Rs 2 lakh every year against the interest amount that you have paid on your residential property. This benefit is available for self-occupied property.If the house is not constructed within 3 years from the end of the financial year in which loan was taken, you will be allowed to claim only Rs. 30,000 as deduction.

b) For under construction property before possession:According to Section 24 of Income Tax Act, if you have taken a home loan for a property that is under construction then the following rules apply:

For reconstruction/ renewal/ repair:No tax deduction is allowed for interest paid in EMIs before completion of the property.
Purchase or construction:The interest amount that has been paid before the completion of construction would be treated as tax deduction in 5 equal installments for the next 5 financial years.

c) Tax treatment on vacant property:

Vacant property: As per Income Tax rule (Section 24), you will be required to account for deemed rent on the property as taxable income. Deemed rent is notional rent based on market rental values in the vicinity. Interest paid on loan taken to buy the property can be set off from the taxable income. An individual can only claim interest benefit on an amount of Rs. 2,00,000 on vacant property.
Property not self occupied for reason of employment, business or profession in different place or other city: As per Income Tax Rule (Section 24) tax deduction allowed is capped at Rs 2 lakh.
Property is part self occupied and part is rented out: The interest must be spilt in proportion of the size of the two parts and tax benefit shall be split proportionately.

Deduction for Joint Home Loan: If the housing loan is availed by two or more people jointly, each of them can claim a deduction of up to Rs 2 lakh for interest payment and Rs 1.5 lakh on principal payment. However the total deduction claimed cannot exceed the actual interest paid and principal amount repaid during the year. However, please remember that a co-applicant who is not a co-owner is not allowed to claim these tax deductions. Similarly, a co-owner who is not a co-applicant on your loan is not eligible for these tax deductions.

Second home or additional property: However, you can claim a deduction of up to Rs 2 lakh every year for interest component of your EMI for a loan taken to purchase a second home loan. However, in the case of second home loan, you are not eligible for tax benefits on annual loan repaid under Section 80C.

Tax Benefits on Personal Loans:

A personal loan is an unsecured loan taken by individuals to meet their financial emergencies. There are no direct tax benefits defined for personal loans under Income tax Act. However, you can get tax exemptions on personal Loan if you are taking the loan for certain specified purposes such as:

Construction, Repair or Purchase of Property: As per section 24 of the Income Tax Act, the government allows tax deductions on any kind of loans taken to buy or repair residential properties. If you can prove that you have used the loan for a valid expense, you can claim tax deductions on the interest paid on the loan.

For a property that is self-occupied, interest charges of up to Rs. 2 lakhs can be claimed as a deduction from the income earned during a specific assessment year.
For loan repayment on construction, a claim cannot be made for the interest charges paid. The claim can only be made after completion of the construction which should be fulfilled within 3 years from the time of availing the loan.

Personal loan for business purpose:If a personal loan has been used in your business, the interest paid on the loan would be considered as a business expense. This, in turn, will reduce the net taxable profit of the business, thereby lowering the tax liability. There is no prescribed maximum limit for the interest amount which can be claimed as a tax deductible expense.

Purchasing assets: If a personal loan has been taken to purchase any asset like jewelry, shares or non-residential property, the amount of interest paid will be added to the cost of acquisition of the asset. However, deductions won’t be available immediately in the year in which the interest has been paid. It will be added to the cost of acquisition and will benefit you in the year the asset has been sold as it will reduce your capital gains tax liability

Education purpose: If you have availed the personal loan for the education purpose, you can avail tax deduction on the interest paid under Section 80E of the Income Tax Act, 1961. You can claim deduction if you have taken an education loan to support higher studies of self, your spouse, children or any other child for whom you are a legal guardian.

Tax benefits on Car Loans:

Car loans availed by self-employed individuals or businessmen for vehicles that are used for commercial purposes are eligible for tax deduction under Section 80C of the Income Tax Act. The car must be registered in the name of the business or business owner (if it’s a proprietary firm or a practising professional). A salaried employee, on the other hand, cannot claim tax deductions on car loan interest repayments like with a home loan. The reason behind this is that in case of businessmen, interest expense on car loan is considered as a business expense required to run the business. In the case of salaried individuals, interest expense on car loans is considered as a consumption expenditure and hence, is not eligible for tax exemption.

Conclusion: Now that you know that it is not only home loans where you can enjoy attractive tax benefits. You can avail similar tax benefits on other loans as well, thus reducing their overall cost. Now, this gives you one more reason to not wait to fulfil your dreams as their cost is even lower than the quoted cost, if one accounts for tax deductions.