From getting out of temporary financial problems to achieving our dreams, loans help us in many ways. But apart from the apparent benefits, loans can also help you save tax. Let’s look at how to save income tax with the help of loans.
Tax Benefits on Loans
The Indian Income Tax Act specifies varying tax limits on different types of loans. While some loans may get you tax benefits on both principal amount and interest, few bring benefits on either of the portions. Let’s look at some types of loans and the tax benefits offered.
Income Tax Benefits on Home Loan
Buying a house is an expensive affair. With home loan amounts ranging in lakhs or crores, the EMIs can put a deep dent in your pockets. However, the government allows you to enjoy some tax breaks on both the interest and principal portions of the loan. Depending on the purpose or the status of the home loan, the tax benefits vary, as follows:
- Section 24(b):Under this section, you can claim a deduction on your taxable income against the interest paid towards the loan in a year. The maximum deduction is ₹2 lakhs.
This deduction is only allowed on self-occupied or rented houses.
- Section 80C: Under section 80C, you can claim a maximum deduction of ₹1.5 lakh from your taxable income against the amount paid towards the principal portion of the loan.
- Section 80EE:Under this section, first time home buyers can claim an additional deduction of ₹50,000 apart from the ₹2 Lakhs deduction available under section 24(b).
- Section 80EEA:Section 24(b) does not allow homeowners to claim a deduction if the home loan is availed for under-construction property. However, the interest paid for during the pre-construction period can be claimed for deduction once the construction period is over in five equal instalments thereafter, subject to specific terms and conditions.
Tax Benefits on Home Renovation or Home Improvement Loan
Home renovation loans help you bring improvements to your home, including adding a floor or a room. The interest paid towards home renovation loan is eligible for deduction under section 24. The maximum deduction allowed is ₹30,000 per year, and this is a part of the total ₹2 lakh deduction allowed on loan interest repayment.
Thus, if you have two loans, a home loan and a home renovation loan, the maximum interest deduction allowed will be ₹2 Lakh.
Income Tax Benefits on Education Loan
You can claim tax benefits on education loans to pursue studies in India and abroad. These benefits apply only to the interest amount of the loan under Section 80E. Claim the tax benefits for a maximum of 8 years from the time of education loan repayment or the total duration of the loan repayment, whichever is earlier.
Income Tax Benefits on Personal Loans
As such, personal loans do not come with any tax benefits. However, depending on the use of funds, you can claim certain tax benefits. For instance, if a personal loan was taken for repaying the interest on a home loan, you can claim deduction under section 24(b) and section 80EE. If you’re using the funds to expand your business, you may be eligible for some tax benefits.
Income Tax Benefits on Car Loans
Like personal loans, car loans do not come with specific benefits for individuals. However, if you’re taking a car loan for your business, the interest can be shown as a business expense and help you reduce your tax liability.
Instead of wondering how to save income tax, start sharing your loan details with the professional and claim some more tax rebates, in addition to your usual tax planning.