While taking
a loan allows you to fulfill requirements like buying a house or financing your
child’s education, the repayment of this loan along with the interest levied on
it, does affect your monthly as well as annual finances for other expenditures.
However, there is an additional beneficial side to loans which is the tax
saving angle.
The Indian
Government allows tax benefits for individuals who are repaying loans and these
benefits vary according to the type of loan taken. As per different sections of
the Income Tax Act, 1961, loans can be used as tax saving instruments as well.
The following tax benefits have been updated to include changes introduced by
the budget 2014-15 -
Tax
Benefits/Exemption on Home Loans
When taking
a home loan for purchasing a property, an individual is eligible for tax
deductions on both principal amount as well as on the interest that is paid for
servicing the loan.
Deductions
on Principal Amount
Tax benefits
for the principal loan amount as defined under Section 80C of the Income Tax
Act, 1961, now allows a maximum deduction limit of 1,50,000 INR (increased from
Rs.1 Lakh as per the budget 2014-15); and this amount is inclusive of other tax
saving investments as well. These deductions are applicable only once the
construction of the property is complete and not for the time period during
which the property was under construction.
For those
who invest in under-construction properties (e.g. – Flats in township projects)
whose values are less than the basic value once the project gets completed,
they also have to pay service tax on the loans taken to acquire the property.
Note that
the basic value here is the actual market value for the sale of a residential
flat once the construction is complete.
Deductions
on Interest Amount
Section 24
of the Income Tax Act has certain provisions that allow tax benefits on the
interest paid on the principal loan amount.
For
construction or purchase of a new property, you are eligible for deduction of
up to Rs. 2 Lakhs for the interest amount paid (as per the budget 2014-2015),
if the property construction was completed within 3 years from the end of the
financial year in which the loan was issued. If the property is not
acquired/constructed completed within 3 years from the end of financial year in
which the loan was taken, the interest benefit in this case would be reduced
from 2 Lakhs to Rs 30 thousand only.
If you’ve
taken a loan for repairing or renewing your property, you are eligible for a
deduction under Section 24(b). This is over and above the flat 30% deduction
available annually for the maintenance of property. However, there is a
restriction on the amount—Rs.30,000 per fiscal, irrespective of whether it is
self-occupied or you rent it out.
Tax
Benefits/Exemption for Educational Loans
Unlike home
loans, only the interest on repayments is applicable for deduction and not the
principal amount. As defined in Section 80E of Income Tax Act, 1961, this
deduction is applicable only for an individual for higher education with no
fixed upper limit.
Here, higher
education can be defined as any course that you pursue after Senior Secondary
School Level in India or abroad.
It is
important to understand that the education loan should be taken from a
financial or approved charitable institution, to be eligible for tax benefits
and you can avail this tax benefit for a maximum period of 8 years or full loan
repayment period, whichever is applicable. For e.g., if you have paid off your
education loan within 5 years of the course completion, deduction benefit can
be availed only for that time frame and not beyond that.
Tax
Benefits/Exemptions on Car and Personal Loans
For salaried
individuals, no tax benefits are available if you have taken a car loan.
Deductions from payable tax can be availed only if you are self-employed or a
businessman, and you declare the profit or capital gains earned from your work
or business, or if you purchase a vehicle for business use. In that case, you
get exemption on the interest as well as depreciation of the vehicle.
For example
– Borrower A, who works in a private software company, has bought a brand new
car to commute to and fro from home and work. He might be reaping the
convenience of owning a four wheeler but he will not get any tax benefit for
taking a loan to purchase it. On the other hand, a small time businessman who
has a textile store has also bought a new car. Now if he declares his earnings
as deductible under section 80C, he will be able to include the interest paid
for his car loan for tax exemption.
Another way
of getting tax exemption for your vehicle is by financing it through a home
loan. However, this umbrella loan puts your property at the highest risk in
case of any payment defaults.
For personal
loans, deductions are applicable only for a declared business and its earnings;
or for the interest on loan repayments used for property construction.
While this
is a broad overview, it is useful to be informed about loan tax benefits if you
are going to take a loan, or if you are already repaying one. Being aware can
be beneficial in saving on your taxes.
