When you are planning to buy a house or going for a higher education, loans comes as an important tool to fulfill your money requirements. And what’s more to ask, if they gives you a benefit on tax front also. Let us see various tax benefits on different types of loans.
Home loans
While taking a home loan, as an individual you are eligible for tax benefits on both interest and repayment of principal. Under section 80C of the Income Tax Act, 1961, a maximum deduction of Rs.150,000/-(Rs. One lac only) is allowed from taxable income. However, this amount is inclusive of other tax saving instruments like PF, PPF, NSC, Life insurance premium etc. Important to note that these tax benefits are only applicable on fully constructed self occupied property which remain under your ownership for at least 5 years. In case the ownership of the property is transferred before the completion of 5 years, the exemption availed on this property even in previous years will also become part of taxable income.
The interest paid on the home loan taken for buying a new property is also eligible for deduction up to Rs. 2.0 Lacs. This amount of Rs.2.0 lacs is over and above Rs.1.5 lac of exemption under section 80C. The only condition is that the construction of the house should be completed within 3 years from the end of the financial year in which the loan was taken. In case the property is not self occupied, then there is no upper limit on this tax deduction.
Education Loans
The loans taken for the purpose of paying fees for higher education are also tax beneficial. Under section 80E of Income Tax Act, 1961, the interest paid on the loan taken for higher education is deductible from your taxable income. There is no upper cap or upper limit to this deduction. The higher education is considered to be any course pursued after Senior Secondary schooling whether in India or abroad. The interest of loan taken from any financial institution or approved charitable institution is only eligible for such tax benefit for the entire repayment period or 8 years, whichever is less. As such any loan repaid within the period of 6 years will allow to claim deduction only for those 6 years and not beyond that.
Personal & Car Loan
Though, such loans does not give any tax benefit in the hands of individual, however in case of vehicles bought for business use, the interest and depreciation may be taken as expense. As such deduction of these expense from business profits reduces the tax liability. Even the running and maintenance expenses on the vehicle bought by the company for business use may also be considered as business expense. Some people also use money taken as home loan to finance their car, as such claiming the home loan tax deductions. Similarly, personal loan taken for business use also let you consider the interest as an expense to the business.
Though, it is important to know about the tax benefits on these loans however taking loan specifically for tax benefits is not advisable. The loans creates a liability in your individual account and should be used as a tool only to fulfill various important objectives on one’s life.
