Tax Benefits on Loan: Sometimes there comes a time when money has to be managed through loans. For example, some people have to take a loan from a financial institution for higher education or to fulfill their dream of home or buy a car or take a loan for business needs. These loans not only meet the financial requirements but also certain types of loans offer tax benefits under special circumstances. You can avail tax exemption not only on home loan and loan taken for higher education but also on personal loan and car loan. In such a situation, it is important to know the rules of tax deduction related to loans so that your liability can be reduced.
Home Loan
- Interest paid on home loan is eligible for deduction up to Rs 2 lakh per financial year under section 24 (b) of the Income Tax Act, 1961, if it is a self-occupied property.
- Apart from interest, deduction of up to Rs 1.5 lakh per financial year can be availed under section 80C on the principal installment of the home loan.
- If you are buying a house for the first time or have taken a loan under the Pradhan Mantri Awas Yojana Urban (PMAY-U), then you get the benefit of additional deduction under section 80EEA in the gross total income on the interest of the loan in every financial year, subject to certain conditions. Note that this deduction is in addition to the benefit of deduction under section 24(b) i.e. deduction benefits up to Rs 3.5 lakh on interest paid in every financial year on home loans taken under the affordable housing category.
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Higher Education Loan
- Individual aces get deduction under section 80E on interest paid on loan for higher education.
- Deduction will be available from the year from which you start paying the interest of the loan and then you can avail it for seven consecutive years or till the full interest is paid, whichever is earlier. This means that the interest on loan taken for higher education can be availed of deduction benefits for a maximum period of 8 years. This deduction is available not only on loan availed for self but also on loan availed for relative.
- The maximum interest limit for deduction is not fixed but the principal installment of the loan does not get tax benefit.
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Personal Loan
Generally, there is no direct tax benefit on a personal loan but one can avail tax benefits under section 43B if it is taken for a specific purpose such as a small business or if the loan is for home repair/renovation. If taken, you can also get tax benefit under section 24(b).
Car Loan
- If you have taken a loan to buy a car, then you can also get tax benefits on its interest. However, for this it is necessary to show the loan in the book of accounts of the business or profession and the interest paid should be claimed as deductible expense under section 43B of the IT Act. In such a situation, ask for interest certificate on the car loan from your bank.
- Deduction benefit will be available only on the interest of the car loan and not on the principal portion of the EMI.
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- Depreciation benefit is also available under section 32 of the IT Act. However, keep in mind here that if the car is bought before 30 September, then you can claim depreciation up to 15 percent of the value of the vehicle, but after that i.e. on or after 1 October, then only 7.5 percent depreciation benefit will be available.
- Interest paid on loan for purchase of electric vehicle is eligible for deduction under section 80EE. The deduction limit is Rs 1.5 lakh.
(Input: Axis Bank Blog)
(This article is for informational purposes only. Take the final decision after consulting your tax advisor.)
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