Tax Benefits of Loans in India

Updated: 30-12-2022 11:18:29 AM

The key purpose of a loan is to help individuals out of financial difficulties or finance planned expenditures even if they do have not the funds available immediately. Loans, as a financial product, are need-based in nature i.e. they are usually opted for to serve specific purposes. 

For instance, home loan for building/buying/renovating a home, education loan for paying course fees for higher studies, car loan for purchasing a new car or two-wheeler, business loan for starting a new venture or expanding the existing one, personal loan for emergency medical expenses/wedding, etc. However, even though need-based, some loans do offer specific tax benefits that can decrease the overall tax burden for the borrower. An individual can avail the following income tax benefits on different loans:

 

Tax Benefits of Home Loans

While a home loan is primarily considered to be a loan for purchase of a house, such loans can also be obtained for renovation of house, purchase of a plot of land for residential purposes, for construction of a house, etc. With home loan, an individual can get the following tax benefits:

• Section 80C Benefits – Tax deduction of up to Rs. 1.5 lakh annually for repayment of home loan principal. This benefit is not applicable to home loans for purchase of residential plot or to home renovation loans. Additionally, this Rs. 1.5 lakh limit is subject to the rules as applicable to various qualifying investments/expenses under Section 80C (such as EPF, PPF, ELSS, life insurance premium, etc.).  
• Deduction of the interest amount towards the loan availed under Section 24 (b). This section of the prevailing Income Tax Act provides the conditions under which the borrower can claim tax deduction on home loan interest repayment. Under Section 24(b), an individual can claim a deduction of up to the Rs. 2 lakh if they have taken a home loan whether for a self-occupied home or a let-out house. 

An additional deduction of the interest payment for home loan is also available under Section 80EE of the Income Tax Act. This is benefit available only to first-time home buyers who are purchasing a property under the affordable housing scheme. The limit of interest benefit under Section 80EE is restricted to the maximum limit of Rs. 50,000 annually. This section originally introduced in FY 2017 has now been extended to home loans approved up to 31st December 2020 in Budget 2019 (subject to affordable housing rules). 

Tax Benefit of Education Loan Repayment 

Higher education is extremely important to survive in such a competitive world. However, the increasing cost of quality education is a concern for many good students and their parents. Education loans are available to students to help them fund their higher education expenses. Apart from this, the government of India also provides some incentives as tax benefits to those who have availed education loans.

When you have an education loan, you can get the following tax benefits on it:

• The deduction of interest payment towards the loan without any specified limit under Section 80E of the Income Tax Act. The maximum tenure over which you can get the interest repayment benefit of an education loan is 8 year.
• During the study period, the lender will only charge simple interest on education loan availed.
• Education loan lenders provide students with a moratorium of up to 1 year after the completion of higher education or after securing a job, whichever is earlier. While not a tax benefit, this also decreases the loan burden for the borrower.  

However, do note that there is no tax deduction benefit applicable to the education loan principal repayment. 

Tax Exemption on Business Loans

Business loans are typically used by businesses and business owners to either set up new businesses or expand the operations/scope of existing businesses. A business loan may be secured against property or equipment or it may be unsecured i.e. provided without collateral. You can also get a few tax benefits on the repayment of business loans. The business loan interest amount repaid is tax exempt as it can be shown as part of the business expense but there is no tax benefit for the business loan principal repayment. 

Tax Benefit of Personal Loans

Personal loans are unsecured loans i.e. there is no collateral required in order to avail this this loan. Generally, a personal loan does not provide any tax benefit however there are a few exceptions to this general rule as follows: 

• Payments made towards interest component of personal loan, if identifiable for the use of buying a home/home renovation, is tax deductible under Section 24 (b) of the Income Tax Act, 1961.
• Pay outs made towards the interest component during personal loan repayment, if identifiable as earmarked for business establishment/expansion, can be considered as business expenses and provide tax benefits to the borrower.

Not only is there no tax benefit on the principal payment of the personal loan even in the above cases, in all other cases, this type of loan does not offer any tax benefit. 

Tax Benefit of Car Loans and Two-Wheeler Loans  

Car loans and two-wheeler loans are for the purpose of vehicle purchases. If such loans are taken for the purchase of personal vehicles, there is no tax benefit from the loan. The case is a bit different if the vehicle loan is taken for purchase of commercial vehicles such as those required by transport and logistics companies. The interest paid to service this type of car loan/two-wheeler loan can qualify as business expense incurred in operating/expanding the business. This is deductible from the gross income of the business and provide tax benefit on car loan and two-wheeler loan to the borrower.