How do loans help us save income tax in India? Which loans are these?

Every year we are being reminded of planning our taxes. And none of us is okay about the fact of paying taxes. Most of us are disinclined towards paying tax. And there are times we dream of living in a tax-free world. Isn’t it?

Considered as a financial burden, taxes could bring in more pain if we are not well-versed in managing our taxes.

A lot of us suffer since we get muddled in managing our finances. If you’re also one of them, do not worry, as this blog shares all the useful insights that will help you get better control of managing your yearly taxes.

There are different sections of the IT Act 1961 under which the taxpayer can claim the advantages related to repayment of loans.

Let’s explore the different ways:

Under Section 80EE

Under section 80EE, a home buyer in India is eligible for tax benefits of up to Rs. 50,000 on the interest paid on the home loan.

But, there are a few conditions that need to be fulfilled in order to claim this deduction:

• Loans should be taken from a non-financial organisation.
• The loan value must not exceed 35 lakhs.
• As on the loan sanction date, the individual should not hold any other property.
• Stamp value of the house should not exceed fifty lakh rupees.
• The deduction applies only for the interesting part of the loan.

Section 80C

Under Section 80C, you can claim a deduction on the repayment of your home loan. This deduction applies only to the principal amount. The limit for tax exemption under 80C is 1.5 lakhs.

To claim the deduction, you must fulfil the following requirements:

The loan should be availed for construction or buying a new property.

The property should not be sold out within 5 years of purchase.

If the property is sold in less than 5 years, the payer will have to repay the exemptions on loan (in the year property was sold)

If you are looking for tax-saving options other than the ones mentioned above, check out our latest finding on some non-section 80C tax saving benefits:

Tax saving on health insurance

For individuals aged below 60 years, the limit amounts to Rs. 25,000, as of now. This limit covers self, spouse, children, and the cover could be a Floater plan for the family, Mediclaim, Critical illness, etc.

The premium paid towards these schemes is taken away from the gross income under section 80D.

And for the ones above 60 years of age, the limit amounts to Rs. 50,000. However, if the taxpayer and the parent are above 60 years, a deduction of up to Rs. 1 lakh can be availed. Apart from it, payments made towards health check-ups amounting to Rs. 5,000 also qualify for the tax saving, but it should be within the overall limit.

Repayment on education loans

The tax-saving benefits on education loans qualify when the loan is for higher education. According to the Income Tax Act, “Higher studies mean any course pursued post the Senior Secondary Examination or its equivalent board/university recognised by the Central or State government or local authority.”

The interest on loans for higher education qualifies for deduction from the total income under Section 80E, with no monetary claim on the interest. These loans should be availed from a registered educational/financial institution and can be used fors educating self, child, and spouse.

The deduction is permitted for the initial assessment year or till the interest is claimed, whichever is initial.

National Pension Scheme Tax Saving

According to section 80CCD(1B), the taxpayer (employed or self-employed) is allowed a deduction on the amount given towards NPS of up to Rs 50,000. The deduction under Section 80CCD(1B) is above the deduction availed under Section 80CCD(1), but the same amount can’t be claimed under both sections.

Tax Exemption on Auto Loans

Auto/cars are categorised under the luxury items wherein no tax saving benefit is given to customers who avail car loan for purchasing a vehicle.

Some other features of car loans in India include:

Car loans availed by individuals do not offer any tax-saving benefit.

Car loans availed by employed individuals for commercial vehicles are eligible for tax deduction under 80C of the Income Tax Act.

Personal Loans

Personal loans can be availed for income tax exemption only if the loan is applied for business purposes. Apart from it, there is no form of tax rebate in personal finance. In the case of house construction, you can claim deductions under Section 24 and Section 80C.

Personal Loan for business

If the personal loan is to be invested in the business of the borrower, then the interest paid on the loan can be claimed as a tax-deductible expense. This interest will be deducted from profit before assessing the tax liability. This, in turn, reduces the net taxable profit of the business along with tax liability. There is no prescribed limit for the maximum interest amount, which can be claimed as a deductible expense.

As per Section 24(b) of the Income Tax Act, 1961, a tax rebate on the personal loan is allowed if the amount is meant for home improvement.

Hence, interest paid can be claimed on personal loan repayment of up to Rs.30,000 as a deduction from the total taxable income. If the amount is used for residential house purchase, a deduction of up to Rs.2 lakh is allowed for the paid interest.

Thus, leveraging tax savings on a personal loan can be done by using the amount for home renovation.

Conclusion

Now that you have an understanding of the tax exemptions and the benefits they offer, you can apply for a loan as per your requirement and get rid of the financial stress of paying EMIs. And the next time you consider taking a loan, ensure that you spend time understanding the technicalities that come along with it.

Take a deep dive into the total amount you can borrow, the number of EMIs, tax benefits, and the interest you would end up paying. Since India is a flourishing country, the government encourages people to lend money from banks and financial institutes. The reason being, it helps in fostering the Indian economy. Do not miss out on these loan taking policies and leverage the best out of them.

Also Read:

1) How to Prepare Your Business for Tax Season?
2) How To Reduce Your Taxable Income?
3) What Kind of Benefits do We Get by Paying Taxes in India?
4) What Is Lower Tax Deduction Certificate?
5) How are the mutual funds taxed in India?