How do Loans Help us Save Income Tax in India?
Last Updated : Oct. 17, 2020, 7:06 p.m.
What would be your reaction when you know the loan you are paying may return you something invaluable? You might be pleasantly surprised! The ‘Return’ refers to the income tax exemption on loans. At a time when every penny counts, saving income tax from your loans will only make you feel good when repaying them. But before you celebrate knowing the tax savings on offer, you should know that income tax benefits don’t apply to every loan. These benefits apply to select loans such as home loans, education loans, car loans, etc. So, if you are paying any of these loans, you should read this post and know how you can save taxes on the same. Let’s get started!
How Will Tax Benefits on Loans Work Out?
A loan EMI, which we pay every month to the lender, includes a portion of both interest and principal payments. Now, some loans would have tax benefits on both interest and principal portions, while others can have benefits restricted to just the interest portion. The Government of India has specified tax exemption limits regarding different loans. So if you have given information about loans, which are eligible for tax exemptions, to your office, you will get tax benefits on your salary. Specified tax exemption limits will be deducted from your gross annual income to reduce the taxable income and the taxes. For some, the income tax liability could even be ZERO with such exemptions on offer.
Let’s Talk About Income Tax Benefits for Home Loan Borrowers
The income tax benefits on home loans depend on the purpose for which you are taking a loan as well as the status of the home post its purchase. You could either stay in your home or put it on rent after purchasing the same. Similarly, you could take a home loan to renovate your home or purchase an under-construction property . Depending on what you do with a home loan, the tax benefit will vary. Let’s discuss tax benefits regarding each of these home loan aspects.
Tax Benefits to Have When You Take a Home Loan to Buy a Fully Furnished Home
When you do that, you will get tax benefits on both principal and interest repayments of home loans under different sections of the Income Tax Act. If you are staying in the house you have bought, you will get tax deductions upto INR 1.5 lakh on principal repayments and upto INR 2 lakh on interest repayments under Section 80C and 24 of the Income Tax Act, respectively, in a financial year. But when you put a home on rent, there will be no limit of tax deductions on interest repayments of a home loan.
How Much Tax You’re Going to Save When Buying an Under-construction Property with a Home Loan?
Prices of fully furnished homes are quite high and out of budget for some. As a result, they go for an under-construction property that costs less. You will get tax deductions on the interest payment on a home loan during the construction phase post the completion of the housing project. The deductions will happen in five equal installments for 5 five years post the completion. If you occupy the property before the completion of these 5 years, the tax deduction will be capped to INR 2 lakh. Tax benefits will also apply to stamp duty and registration fees of the property.
How Much Tax Will You Save When Taking a Home Loan for Renovation?
Tax benefits on home loans taken to renovate a house may differ according to the nature of the property. If you renovate a self-occupied house, there will be capping of tax benefits on interest payments. The tax benefit is capped to INR 30,000 in a financial year. Whereas, if you renovate a let-out property (rented property), the entire interest payment can be claimed for availing tax deductions.
Education Loans
Students availing education loans to pursue studies in India and abroad can also get tax benefits, which will apply to the interest portion of their loan. The tax benefits, which are available under Section 80E, can be claimed for a maximum of 8 years from the time they start repaying the education loan.
Personal Loans
You might feel surprised to know that personal loans can give you tax exemptions. But that will depend on your purpose. If you have taken a personal loan for business purposes, you can claim tax deductions. However, other purposes won’t qualify for tax benefits.
Car Loans
Car loans also come with tax benefits for self-employed professionals or business owners, courtesy Section 80C. But they need to use the car for business purposes to get tax deductions. Salaried would, however, can’t avail tax benefits on a car loan.
What Do You Need to Do If You Want to Avail These Tax Deductions?
Salaried can fill the loan details in the investment declaration form, which they can get from their employer. The declaration form needs to be supported with valid documents authenticating the loan repayment being made by salaried. You can submit the loan statement and get it certified by the lender that has given you the loan. The statement must bear the signature and seal of the competent lending official.
Whereas, for getting tax benefits on car loans, self-employed professionals or business owners will need to mention the car loan interest payment they have made in a year when filing their income tax returns. They should ask the bank to issue them a loan statement or interest certificate. With that, they can know the interest payment they have made in a year. The tax officials will go through the details carefully and approve tax deductions upon successful verification.