Tax Benefits on Loans

There are different tax rebates for different loans. These range from education loans, home loans, car loans, and personal loans. Some loans do not have any tax benefits while some offer a tax exemption.

Loans, be it of any type, are a great liability on any customer. Loans like home loans and auto loans have a considerable tenure too which makes repayment a really difficult and dreary regular task. However, one of the most significant positive side of loans is that a lot of these loans offer income tax benefits to customers. According to the Income Tax Act, 1961, different types of loans offer various kinds of tax benefits to customers who are repaying their loan.

The task of obtaining a specific loan is solely dependent upon the financial need for which you require loan. So, loans cannot be chosen by customers based on the tax benefit that they offer. However, loans can very well be used to cut down on the income tax amount that an individual or a business house pays every year to the government.

Since different loans offer different tax rebates, let us look into each one these separately to get a fair idea of how much you can save on your income tax if you are repaying any of these loans.

Tax Exemption on Education Loans

With various measures being put into practice by the government to promote higher education, people have become aware and ready to even venture out of the country to study. However, the cost of education, especially professional courses like medicine and engineering is still quite high. This hold true for both domestic and overseas courses. The growing competition for jobs in the country makes sure that financial hurdles do not deter people from pursuing higher education. This is when education loans come into play. Education Loans for higher and professional education are offered by various public and private sector banks.

Public sector banks run various promotional schemes too on education loans so as to promote higher education on easy and convenient terms.

Some of the most important characteristics of tax rebate on education loans are listed as under:

  • Tax benefits for education loans are offered under Section 80E of the Income Tax Act
  • Tax benefits are applicable only if the education loan is taken from a financial or approved institution
  • Higher education loans are offered for courses that any individual decided to opt after completing his or her senior secondary school level, in India or abroad
  • Only the interest paid towards education loan repayment is eligible for tax deduction
  • Tax benefit on education loan can be availed for the full loan repayment period or for a maximum of 8 years, whichever is earlier
  • There is no limit on the maximum interest amount that you can claim tax deduction on
  • Deduction for education loan interest can be claimed only by individual on whose name the education loan has been availed
  • Tax benefit on education loan is applicable only if the repayment of loan has already been started by loan borrower
  • Almost all education loans in India come with a moratorium period which is usually 1 year or 6 months after the student gets a job. Interest during the moratorium period gets accrued and is taken into account when the final monthly loan installment is calculated by the lending bank.

Tax Exemption on Home Loans:

Home loans are one of the most hefty loan liabilities that customers in India avail. Not only is the amount and tenure on these loans massive but also the loan installment that customers are required to pay are large sums of money. Contrarily, the tax benefits that customers get to reap on home loans are great.

Some of the most important aspects of tax benefits on home loans in India are listed below:

  • Both principal and well as interest paid on home loans is eligible for tax deduction
  • Tax benefits towards home loan repayment are offered under section 80C of the Income Tax Act. Maximum amount of deduction allowed is Rs.1,50,000 which is a result of a raised figure announced by the Ministry of Finance
  • Tax deduction for home loan are valid only if the construction of property is complete and not during the time when the property purchased in under construction
  • Customers who invest in properties that are under construction do not get to enjoy tax rebate until the construction is complete. Such customers are however, required to pay service tax on the loan that they take to purchase the property
  • There is good news for customers who have bought a property between April 2014 and March 2015. These customers can avail tax deduction on stamp duty and registration charges that they have paid for acquiring the property. This deduction is subject to a maximum limit of Rs.1,50,000
  • For first time home owners who have bought a property between April 2013 and March 2014, section 80EE of the Income Tax Act offers tax benefit of up to Rs.1,00,000.
  • Section 24 of the Income Tax Act reduces the Income from house property by the amount of interest paid on home loan when the loan is taken for purchase, renewal, reconstruction, repair, or construction purposes. Maximum deduction allowed under Section 24 is Rs.2,00,000.
  • No maximum limit is applicable for deduction under Section 24 if the property is not self-occupied. In case the reason for not staying on the property is something related to employment, business or profession, then the limit of 2 lacs remains applicable.

Tax Exemption on Car/Auto Loans

Cars come under the category of luxury items and as such no tax benefit is offered to customers who avail car or auto loan for purchase of vehicle.

Few significant points about car loans in India are listed below:

  • Car loans availed by individual customers do not offer any tax benefit
  • Car loans availed by self-employed individuals for vehicles that are used for commercial purposes are eligible for tax deduction under section 80C of the Income Tax Act

Tax Exemption on Personal Loans

Personal loans availed by customers are eligible for tax exemption only if the loan is sought for business purposes. Other than this specific case, personal finance does not offer any form of tax rebate to customers.

Listed above are almost all popular loan types prevalent in the Indian financial market and the corresponding tax benefit attached to each. It is always a good practice to know in-depth about various tax exemptions that one is eligible for before one actually avails finance of any type.

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