Here are Loans That Help You Avail of a Tax Benefit

So we can say that all these loans have the potential to help you in case of a financial emergency and add value to the cost of the loan, depending upon the reason the loan is opted for. But do you know that apart from accomplishing your financial goals and helping in case of a cash crunch, these loans can also help you save tax?

Here are the most common types of loans that can help you save income tax:

1. Home Loan:

All of us wish to build our dream house. Owning a home is one of the important goals we aspire to achieve in life. As it is one of an individual's salient and expensive assets, buying a home needs huge financial support. A home loan is a common type of loan that individuals can avail from a bank or Housing Finance Company to fulfil the goal of having their own house.

The government of India periodically launches various schemes that encourage citizens to buy a house, which further boosts the real estate industry. A home loan can save a significant amount of tax outgo as it comes with multiple tax benefits. Here are some of the tax benefits of a home loan:

• The interest paid in a financial year is eligible for deduction of up to Rs 2 Lakhs under Section 24 of the Income Tax Act, 1961. The maximum deduction of Rs 2 Lakhs is applicable only for the interest paid on a self-occupied house property. And there is no upper limit on the let-out property. You can claim the deduction from the year the construction of the house is completed.

• The principal amount paid is eligible for a deduction of up to Rs 1.5 Lakhs under Section 80(C). However, you cannot sell the property within 5 years from the date of possession. Otherwise, it will be considered as income in the year of sale.

• Under section 80EE, you can claim an additional deduction of up to Rs 50,000 on interest payable. However, you need to meet the eligibility criteria mentioned below to get this benefit:

  - The amount of the loan should not exceed Rs 35 Lakhs.

  - The value of the property should not exceed Rs 50 Lakhs.

  - The loan is sanctioned between 1st April 2016 to 31st March 2017.

  - You are a first-time house owner.

• Under section 80EEA, you can claim up to Rs 1,50,000 if you meet the following criteria:

  - The stamp value of the property is not more than Rs 45 Lakhs.

  - The loan is sanctioned between 1st April 2019 to 31st March 2020.

  - You are a first-time house owner.

  - You are not eligible to claim a deduction under Section 80EE.

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2. Education Loan:

Education is of prime importance to any individual, it is an Investment towards one's career development and a necessity to lead a successful life. However, with inflation, education has also become expensive in India as well as overseas. Quality education in India can cost anywhere from Rs 5 Lakhs to 30 Lakhs, whereas studying abroad can cost a minimum of Rs 25 Lakhs. It can be difficult for parents to decide whether to utilise their savings or avail of an education loan for their children.

An education loan covers all the study-related expenses incurred during the course duration. For example, it generally includes admission fee, tuition fee, hostel fee, library fee, the cost of books, a laptop, and travel tickets (if you are studying abroad), etc.

Apart from the benefits of an education loan, it also comes with certain tax benefits:

• Only the interest component of the education loan is eligible for deduction from the income under Section 80E of the Income Tax Act, 1961. So, the principal component is not eligible for any tax benefit.

• You can claim this deduction if you have taken an education loan for yourself, your spouse, your children, or for someone to whom you are a legal guardian.

• You can take this tax benefit from the year you start repaying the loan. However, you can take the tax benefit under Section 80E for a maximum of 8 years or until you repay the interest, whichever is earlier.

There is no limit on the maximum amount you can claim.

3. Car Loan:

Owning a car was once considered a luxury, but it has now become a necessity for many people. The list of benefits of owning a car only grows when we consider the current pandemic. Although we all would like to drive a car, some of us cannot afford to buy it with the full down payment. In fact, many people prefer to buy a car on loan since it is available at an affordable interest rate. Here are the tax benefits on a car loan you can take advantage of:

• If you are a business owner or a self-employed professional and use the car/vehicle for business purposes, then you can claim tax deductions on the interest component of the car loan under Section 43(B) of the Income Tax Act, 1961. But, if you are a salaried person, you cannot claim any deduction for it.

• The car/vehicle owned by a business or business owner or self-employed professional and used for business purposes is eligible to claim depreciation (for the whole year) of up to 15% of the price of the vehicle and other expenses such as fuel and maintenance under Section 32 of the Income Tax Act. However, if you buy a vehicle on or after 1st October, you can claim depreciation only for the half year, i.e., up to 7.5% in the first year.

• If you have taken an electric bike loan or electric car loan for personal or business purposes, you can claim tax deductions on the interest component of the electric vehicle loan for up to Rs 1.5 Lakhs under Section 80EEB.

4. Personal Loan:

Personal loans can be very helpful in an emergency or during a financial crunch because these can be availed of with minimum documentation and do not require any collateral. They offer fast cash solutions in less time and have shorter tenure. However, since a personal loan is treated as a luxury loan, it has no direct tax benefits. However, you can take advantage of a tax deduction on personal loans availed for specific purposes:

• To Buy a House or Renovate it:

  You can avail of a personal loan to buy a new house or renovate a house and claim for tax deduction under Section 24 of the Income Tax Act. The maximum deduction of Rs 2 Lakhs is applicable only for the interest paid on self-occupied house property. And there is no upper limit on the let-out property. You can claim the deduction from the year the construction of the house is completed. However, before claiming the tax benefit, make sure you have all the necessary proofs to show how the loan amount is utilised.

• To Start or Expand the Business:

  You can take a secured personal or business loan backed up by property or security to start a new business or expand the existing one. In such loans, you can claim the interest component for tax deduction under Section 43B of the Income Tax Act.

• To Purchase an Asset:

  If the personal loan is used to purchase an asset, such as gold, shares, property (apart from the first house), etc., the acquisition cost increases, lowering the capital gains and ultimately reducing the tax liability.

To Conclude:

If you follow financial discipline and repay the loans timely, all types of loans can be good loans. Whereas delaying the EMIs or defaulting the loan can turn any loan into a bad loan. It is advisable to check the need for the purchase through a loan, your eligibility, the total interest outgo, etc., before applying for any loan. If you follow financial discipline, these loans can help you accomplish your goals and save a substantial amount on tax by smartly utilising them for various tax benefits they offer.

Warm Regards,
Ketki Jadhav
Content Writer