Learn about tax benefits on loans in India

Perhaps it is an act of nature that Indians revel in taking loans for almost any purpose. Often, we have to take loans because we do not have the ready funds. Most loans are need-based such as for building a home, educating a child, purchase of a two-wheeler or car, starting a business venture, wedding in the family, meeting a health-related expense or purchase of household goods.

While the repayment of the loan is of paramount importance it is pertinent to note that there are numerous tax benefits available to the borrower on the repayment covering both the repayment of principal amount and payment of interest towards the loan. 

To serve as an income tax guide, we recount below the income-tax benefits available to you on different loans.

Home Loan

Owning a home is the dream of every Indian and this dream is achievable with the home loan product offered by most financial institutions including banks and NBFCs such as Tata Capital.

When you avail a home loan you can get tax benefits that include

• Deduction of repayment of principal amount from the taxable income for the year under Section 80C along with others up to an aggregate of Rs 1,50,000
• Deduction of interest payment towards home loan under Section 24(b). This section provides the conditions under which you can claim the deduction. For instance, you can claim up to Rs 2 lakh deduction if you have taken a loan for a self-occupied house. You can claim the entire interest if you have taken a loan for a let-out house. Further, you can set off this interest against any other head of income up to Rs 2 lakh and carry forward any amount that is not set off for a period of 8 years.      
• Deduction of interest payment towards home loan under Section 80EE. This deduction is available only to first time home buyers. This section sets out conditions under which you can claim deduction up to a maximum of Rs 50,000 in the year.

From the tax benefits available as above, it makes good sense to buy a home out of borrowed funds rather than use own funds thus saving tax, which otherwise you would have paid.

Education Loan

In today’s competitive world higher education is necessary to succeed. But the cost of higher education is rather steep and many meritorious students belonging to the non-affluent sections of society cannot afford the high cost of higher education. Fortunately, there are lenders who extend education loans to needy students. Besides, the government also provides incentives in the form of tax benefits to students who avail education loan.    

When you avail an education loan you can get tax benefits that include

• Deduction of interest payment towards education loan without any limit under Section 80E for a period of maximum 8 years after commencement of repayment
• Charge of simple interest on the loan during the study period
• 1- year moratorium after completion of the study or securing a job whichever is earlier
• Liberal repayment period 

Since higher education is a desirable objective, the availability of education loans from lenders such as Tata Capital and the concomitant tax benefits make taking education loan highly beneficial.

Business Loan

NBFCs such as Tata Capital provide loans to businessmen who are in need of funds to start a business venture or expand their existing businesses.

When you avail a business loan you can deduct the following

• Interest paid towards servicing the business loan as a deductible expense from your firm’s gross revenue before arriving at gross income

Thus, when in need you can take a business loan and claim expenses towards payment of interest as tax deductible.

Car Loan

Car loans extended by NBFCs such as Tata Capital serve as capital when using the vehicle for business purposes. This loan qualifies as a business loan and the expenses incurred in running and maintaining the vehicle along with the interest paid towards servicing the car loan is deductible from gross income of the business.  

Personal Loan

Almost all NBFCs including Tata Capital offer personal loan to benefit borrowers in need of quick funds for some purpose or the other. Such loans are easy to obtain without too much of formalities because they are generally unsecured loans. Usually, borrows take recourse to these loans when they exhaust limits on other forms of loans such as home loans or education loans.

In general, personal loans do not qualify for any deduction. However, in cases where you use the loan amount for business purposes or for acquiring a home, you can claim

• Deduction of interest towards repaying the personal loan amount specifically identifiable for the use of acquiring a home under Section 24(b) of the Income-tax Act
• Deduction of interest towards repaying the personal loan amount from gross income specifically identifiable as deployed for business

Thus, a personal loan can come in handy with tax benefits as well.  We at Tata Capital offer you all types of loans and we urge you to avail any of our loans to take advantage of the many tax benefits available under various sections of the Income-tax Act.