While loans can place considerable strain on an individual’s financial health, there are a number of upsides that loans offer, especially on the taxation front. Most loans offer borrowers a range of tax benefits and incentives, which can help them not just save on tax, but keep their financial budgets from splintering.
Some loans that offer some of the best tax saving incentives and benefits are as follows:
Housing or Home Loans:
Individuals who have availed of a housing loan or a home loan in order to buy residential property can claim deductions on tax on the principal and the interest amounts paid towards the loan. As per Section 80C of the Income Tax Act, 1961, an individual can claim tax deductions on the principal amount of the loan up to a maximum limit of Rs 1.5 lakhs. However, an individual can only claim deductions under this section after the residential property or house has been constructed and not before.
Individuals can also claim tax benefits under Section 24 of the Income Tax Act with regards to the interest paid towards the home loan under the following conditions:
- Tax deductions up to a maximum of Rs 2 lakhs can be claimed if the construction of the residential property or house was finished before three years have lapsed from the completion of the financial year during which the home loan was approved.
- If the above scenario has not taken place, then the amount of tax deduction allowed is only Rs 30,000
- For home loans availed for the purpose of renovation or repair of an existing residential property, individuals can claim tax deductions as per Section 24(b) to the extent of Rs 30,000 per fiscal year.
Individuals who have availed of education loans can claim tax deductions and benefits under Section 80E of the Income Tax Act, 1961 on the interest that is paid on the repayments made towards the loan amount. Tax deductions can be claimed for up to a maximum of eight years on educational loans that are availed for the purpose of higher education. However, it is important to note that tax deductions can only be claimed on the interest amount and not on the principal amount of the loan. Also tax deductions can only be claimed up to the time the loan is paid out or eight years, depending on which takes place sooner.
Individuals who have acquired personal loans from banks or financial institutions can also claim tax benefits and deductions on the interest repayments towards their personal loan amount. However, these deductions cannot be claimed against the principal amount of the loan. Tax deductions on personal loans only apply under the following conditions:
- If the loan is used for the purchase, renovation or construction of residential property such as a house
Deductions can be claimed on an amount up to a maximum of Rs 2 lakhs as per Section 24B of the Income Tax Act, 1961.
Car or Automobile Loan:
Self-employed individuals who purchase a car or automobile, which is to be utilised for business purposes, can claim tax deductions in the form of the interest paid from the income derived from the individual’s business. The vehicle in question would have to be purchased in the name of the individual’s business. Tax exemptions on automobiles can also be availed by purchasing a car via a home loan.