Understanding the tax benefits of different types of loans in India can help you make informed financial decisions. Whether you are considering a personal loan, home loan, car loan, or educational loan, knowing how these loans can reduce your tax burden can be beneficial.
This guide will teach you the different types of loans with tax benefits in India.
4 Types of Loans With Tax Benefits
The following is a list of 4 types of loans in India that provide tax benefits.
- Personal Loans
If you use a personal loan for your business, you can claim the interest paid as a business expense, reducing your taxable income. Moreover, you can still get tax benefits if you use your personal loan to buy things like jewellery, shares, or property that is not your home. The interest you pay adds to the cost of those things. So, when you sell them, your capital gains tax is lower.
When you take a personal loan from a bank or financial institution, you might get tax benefits and deductions on the interest payments for the loan principal. However, remember that you can only claim these deductions in specific situations, which are mentioned below:
- Business Investment: If you invest a personal loan in your business, you can claim the interest as an expense. It lowers your tax liability and reduces your business’s taxable profits. There is no limit on the amount you can claim in this case.
- Residential Property Purchase or Construction: If you use a personal loan to buy or build a house, you can avail of tax benefits for interest repayment under Section 24 of the Income Tax Act, 1961. There is no maximum limit on the amount you can claim if you rent out the house to someone else. However, the maximum loss you can claim under House Property is ₹2 lakhs. Make sure you own the property to enjoy these tax benefits.
- Home Down Payment or Renovations: Under Section 24(b) of the Income Tax Act, you can claim tax deductions on the interest paid if the personal loan is used for a home down payment or renovations.
- Home Loan
If you want to opt for a home loan, here is some good news for you. Home loans not only help you fulfil your dream of owning a house but can also reduce your tax burden. The government offers tax benefits to make buying a house more affordable.
Here is how it works:
- Section 80C
You can slash up to ₹1.5 lakh off your taxes by repaying the principal amount. However, you need to keep the house for at least 5 years. If you share the loan, both you and your partner can get this benefit.
- Section 24B
For the yearly interest on your EMI, you get a deduction of ₹2 lakh; if it is a joint loan, both of you can claim ₹2 lakh deductions. Calculate your interest and EMI using a home loan EMI calculator.
- Section 80EE
If you are a first-time homebuyer, you have two choices to claim deductions under Section 80EE:
Option 1: If you are buying a home, you can get an extra tax deduction of up to ₹50,000 under Section 80EE, as long as your loan is under ₹35 lakh and the property costs less than ₹50 lakh.
Option 2: For homes approved on or after April 1, 2019, you can claim deductions up to ₹1.5 lakh under section 80EEA. You just need to ensure the house is valued at ₹45 lakh or less and that you have not claimed deductions under section 80EE already.
- Credit Linked Subsidy Scheme (CLSS)
If you are an urban poor person looking to buy or build your first home, you can get help through a Central Sector Scheme. The government will lower the interest on your home loan. Even if you are from the Middle Income Group (MIG), you will be included in this housing scheme. With this scheme, you can save up to ₹2.67 lakhs on your taxes with the Pradhan Mantri Awas Yojana.
- Car Loan
If you are self-employed or run a business, you can get a tax break on the interest you pay for your car loan. To qualify, the loan must be listed in your business records, and the interest should be claimed as a deductible expense under Section 43B of the Income Tax Act. Remember to request an interest certificate from your bank for the car loan.
For instance, if your business or professional income is ₹30 lakh and you paid ₹1.80 lakh in car loan interest during the financial year, that interest is deductible. Just the interest portion of your EMIs can be claimed, not the principal.
You can calculate your interest and EMIs using any car loan EMI calculator.
Additionally, you can benefit from depreciation under Section 32 of the Income Tax Act, which further lowers taxable profits. If you buy the car before September 30, you can depreciate up to 15% of its price. But if you buy after October 1, only 7.5% depreciation is allowed, as the tax rules consider it half a year.
However, the Income Tax Assessing Officer has the authority to decide on the tax benefit. Deductions might be denied if they believe the car was not used for business or profession. Also, interest on loans for electric vehicle purchases is deductible under section 80EEB, up to ₹1.5 lakh.
- Educational Loans
If you take out an education loan, you can use it to cover expenses like tuition, books, housing, travel, and study materials for higher education. You can ask for an exemption under Section 80E of the Income Tax Act of 1961.
This exemption is for the interest you pay on the education loan used to fund your own, your spouse’s, or your children’s education. It applies to loans taken from authorised financial institutions for higher studies in India or abroad after completing senior secondary school.
You can enjoy the tax deduction for the entire loan repayment period or up to 8 years, whichever ends first. The deduction applies to the total interest part of the Equated Monthly Instalments (EMIs) paid during the financial year, not the principal amount.
This deduction is separate from the deductions you can claim for tuition fees paid under Section 80C, which can go up to ₹1.50 lakh. There is no specific limit on the interest amount for claiming tax benefits.
Taking advantage of loans with tax benefits can significantly ease your financial burden. Each type of loan offers its own set of tax benefits, from personal loans to educational loans, under different sections of the Income Tax Act. By understanding these benefits, you can make smart choices that fulfil your financial needs and help you save on taxes.
