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Tax Benefits from Loan

According to the Income Tax Act, 1961, you would be eligible for an array of income tax benefits while repaying the loan amount.

Updated:May 1, 2019, 5:44 PM IST
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Tax Benefits from Loan
According to the Income Tax Act, 1961, you would be eligible for an array of income tax benefits while repaying the loan amount.

When it comes to bridging any gap in finances, funding one’s education, addressing medical obligations or buying a slick four-wheeler, loans have almost always been one’s all-weather friend.

However, did you know that you could get hefty tax benefits from a loan as well!? According to the Income Tax Act, 1961, you would be eligible for an array of income tax benefits while repaying the loan amount.

Read on for a detailed analysis of all such tax exemptions that you can enjoy:

Education loan

The interest that you have to shell out towards the repayment of your educational loan qualifies for tax deduction, under Section 80E of the IT Act, 1961. While there is no set cap on the maximum interest amount that you can claim for tax benefits, it does entail a few important considerations, such as:

- The loan needs to be sourced from a bank or any other approved financial institution

- You can avail tax benefits for the total tenor of repayment or 8 years, whichever falls earlier

- Only the interest component is eligible for tax exemption, not the principal sum

- Tax benefits will apply, only if you have already started the process of repaying the loan

Home loan

Home loans are probably one of the bigger financing products, both in terms of the principal sum and repayment tenor. Conversely, greater are the tax benefits as well. A few key aspects include:

- Both the principal sum and interest qualify for tax exemption

- The tax benefits that you’d be eligible for, towards repayment of your home loan interest, are accorded under Sec 24 of Income Tax Act, 1961 and are a maximum of up to Rs.2 lakhs

- In case of principal repayment, you can claim tax benefits up to a maximum of Rs.1.5 lakhs, under Sec 80C of the IT Act, 1961

- Moreover, if you are a first-time home owner, you would qualify for tax exemption up to an additional Rs.50,000 (over and above the limit of Rs.2 lakhs) under Sec 80EE of the IT Act

Personal Loan

The IT Act does not endorse any specific exemption clause, should you take out a personal loan. However, the purpose for availing such a loan is factored in to determine the tax benefits:

- Personal loan for business purposes- The interest paid towards the repayment of the loan is eligible for exemption, thereby reducing your tax liability. There is no pre-set ceiling on the amount that you wish to claim as an exemption.

- Personal loan for purchase/reconstruction of your house- The interest paid is eligible for tax exemption (under Sec 24), up to a limit of Rs.2 lakhs.

- Personal loan for purchase of other assets- In this case, the interest paid is added to the asset’s total cost of acquisition. Likewise, the interest cannot be claimed as an exemption the year in which it has been paid. Rather, it would qualify for tax benefits, come the year you decide to sell off the asset (jewellery, shares, non-residential property, etc.)

Car loan

Considering it is a luxury item, cars are exempted from any tax benefit, whatsoever. That being said, if you are self-employed and have taken out a car loan to buy a vehicle for commercial/business purposes, the interest paid towards repayment is eligible for tax benefits, under Sec 80C of the IT Act.

To know more, click here.

This content has been created in association with YONO SBI.

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