Loans stand out as a preferred source of financing to acquire ready funds. In India, most loans availed are need-based, such as investment in a new home, funding one’s child’s education, purchasing a new car, an entrepreneurial venture, and so on. The government, therefore, offers home loan tax benefits, alongside that on other credits, to the citizens of India as a push to this populace, and the economy at large.
Income Tax Benefit on Home Loan
On June 1st, 2015, the Government of India launched an initiative called Pradhan Mantri Awas Yojana (PMAY) with an aim to provide ‘housing for all by 2022’. However, skyrocketing real-estate price stands as a hindrance to the fulfilment of this motto, both for the government and masses.
Although a home loan proves to be a resource instrument, it is also one of the heftiest credit liabilities. Home loans involve massive amounts, tenure, and large sums of money as instalments. The Income Tax Act, therefore, offers significant home loan tax benefit, which encourages individuals to avail this advance.
Section 80EE of Income Tax Act allows income tax benefits on the interest portion of a residential property loan availed from any financial institution of India.
An individual must meet these conditions in order to claim an 80EE deduction:
- He/she must not own any other residential property on the date of the sanction of a home loan.
- Value of the property should be Rs. 50,00,000 or less.
- Loan availed to fund the purchase of a home should be Rs. 35,00,000 or less.
- This home loan must be sanctioned by a financial institution or a housing finance company.
In 2019, the government introduced a new Section 80EEA in an effort to extend the housing loan tax benefit. Section 80EEA offers a deduction for interest payments of home loans up to RS. 1,50,000. This deduction is available over and above the deduction of Rs. 2,00,000 for interest payments under Section 24. As a result, taxpayers can now claim a total of Rs. 3,50,000 as a deduction for interest payments on home loans.
Income Tax Exemption on Education Loan
Over the years, the government has endeavoured to promote higher education in the country through numerous initiatives and schemes. Section 80E of the Income Tax Act extends tax benefit on education loans, thereby making such loans more accessible to the masses. It includes the following benefits:
- Interest paid towards education loan repayment is eligible for a tax deduction.
- It can be claimed from the year in which an individual starts paying off the interest on a loan.
- The maximum period allowed for claiming this deduction is up to 8 years after the commencement of interest payment, or till the time interest is fully paid, whichever is less.
- There is no maximum amount under this deduction.
- It is only offered if an education loan is sanctioned by a financial institution or any approved institution.
This deduction is only allowed if the education loan is availed for higher education. Here, higher education refers to courses undertaken after the completion of Senior Secondary Examination (SSE).
Income Tax Exemption on Business Loan
Companies require funds for operation and expansion, and business loans stand out as a preferred source of financing. Businesses can write-off interest payments on such a loan as business expenditure. This addition to expenditure brings down the total taxable revenue of a business. Therefore, business owners and entrepreneurs can reduce their tax liability and invest the funds in the company’s expansion.
So, the interest paid on the principal amount of all business loans, such as working capital loan, microloan, equipment finance, invoice discounting, letter of credit, small business loan, etc., are tax-deductible. A point to note here is that the principal loan amount remains non-tax-deductible. As a result, it cannot be deducted as a part of business expenditure.
Additionally, if the repayment of a business loan is in the form an EMI, which consists of both the principal and the interest, then only the latter is tax-deductible and not the entire instalment amount.
Income Tax Exemption on Car/Auto Loan
Cars belong to the category of luxury items, so no tax benefits are extended for a loan to fund the purchase of a vehicle. However, when a vehicle is utilised for business purposes, a car loan qualifies as a business loan. This loan, thus, qualifies for tax deduction under Section 80C of the Income Tax Act.
Income Tax Exemption on Personal Loan
Although personal loans are not taxable, one can avail tax exemptions against them if the funds availed are channelled towards some specific end-use. The Income Tax Act, 1961, allows exemptions for the following usage of a personal loan:
Investment in business expansion
When a personal loan is invested in a business, the interest paid can be claimed as an expense. A taxpayer can then reduce the tax liability and the net taxable profits of his/her business. Additionally, in this case, there is no cap on the amount claimed by an individual.
Home improvement or renovation
An individual can avail tax benefits on his/her personal loan if it invested in the purchase or construction of a residential property. Repayment of interest can be claimed as deduction under Section 24 of the Income Tax Act. Here, the maximum amount allowed for tax deductions is Rs. 2,00,000 for a self-occupied borrower. Furthermore, there exists no cap on the maximum amount claimed if the house is rented out.
Purchase of assets
Tax deductions can be availed by taxpayers when they use this loan amount for purchase of assets like jewellery, shares, non-residential property, specific stocks, and the like. A taxpayer cannot claim deductions in the same year in which the interest is paid. However, it adds up to the cost of acquisition. So, one can claim tax benefit in the year of sale of this asset.
Loans are indispensable financial instruments in today’s age and time. They fund individual needs, capital investments and stimulate business activities. Loans are, therefore, integral to the growth of an economy, and home loan tax benefits, alongside others, further bolster this growth.