Tax Benefits from Different Types of Loans under the Income Tax Act, 1961

[Arwind Sharma]

Generally, we consider loans to be a necessary financial burden, particularly when we’re looking to buy something big. There are loans for almost whatever you need, and they work because they can help you get closer to your dreams, whether it’s buying a new car, or a way to fund your education.

Not only do these types of Loan assist you meet your financial needs, but also have many tax benefits associated with them too, if you look through the Indian Income Tax Act, 1961.

Read below to see what kinds of taxation benefits are available to you as a taxpayer under the tax law, for educational loans, Home Loans and automobile loans.

1. Tax Benefits on a Car Loan

If you purchase a car as a self-employed individual or as a businessperson, you can claim tax deduction for the interests paid on the car loan for business purposes.

You can also additionally seek deduction for depreciation on your motor vehicle, as long as you are using it for business purposes, under Section 80 of the Income Tax Act, 1961.

Some experts suggest that you can take loan for your car through the Home Loan route, i.e. use the loan money for a car, but they forewarn that this would highest risk in terms of security.

Therefore, the best way to avail benefit under the tax law is to take loan for a car that you would be using for business purposes.

2. Tax Benefits on an Educational Loan

Tax benefits available with loans are not only meant for automobiles or homes. You can fund your educational dreams as well by borrowing an education loan too.

If you are applying for higher studies for you can easily seek taxation benefit under Section 80C as an individual. This deduction does not have an upper limit, but you can only apply for it as an individual.

You can take this loan for a maximum period of 8 years or until the full payment of the loan is made, whichever is earlier. Even here, the tax deduction is applicable to the interest paid and not the principal amount. Therefore, you can apply accordingly.

3. Tax Benefits on a Home Loan

Your Home Loan eligibility depends on your credit rating as well as the resources that you have with you that could back up your paying back the loan. Under Indian law, you can avail tax benefits under two provisions of the Income Tax Act, 1961.

If you are taking a Home Loan for the first time for a self-occupied property, under Section 80C you can claim tax deduction on the principal amount of the loan to an extent of ₹ 1.5 lakhs.

                              

This deduction is applicable to the property that is fully constructed and is not under construction.

In case you are borrowing a home for a second property, then you can claim deduction on the interest that you pay for the loan. There is no upper limit to the extent of deduction you can claim under the Income Tax Act, 1961.

However, your property has to be constructed completely within 3 years. If that does not happen, then you can claim deduction only up to the extent of ₹ 30,000.

Make sure that the documents required for Home Loan is in place so that you can extract benefits correctly.

These are some of the ways in which you can derive financial benefits from claiming deductions under the Income Tax Act, 1961.