Tax-Savvy Borrowing: 4 Loans in India That Come With a Tax Break!

Loans are a crucial element of financial planning as they help you achieve your various objectives in life. Loans can help you buy a home, further your education, or purchase a car. But did you know that loans can also help you get tax breaks?

Yes, you heard me right. In this article, we’ll look at four loans that can help you get tax breaks while providing you with the financial resources to pursue your dreams.

4 Types of Loans with Tax Breaks

Being tax-savvy while borrowing empowers you to achieve your financial aspirations while optimizing your tax situation. Let’s look deeper into each of India’s four types of loans that can be a tool for tax breaks.

Education Loans: Investing in Your Future

Remember when you were preparing for your higher education? At some point, you must have considered financial aid in the form of an education loan. But did you know that an education loan comes with tax breaks under Section 80E that you or your parent can claim when filing taxes? 

Also Read: What is Paid Up Capital?

What is Section 80E? 

Section 80E of the Income Tax Act lets you claim tax deductions on educational loans. This tax break is only available for the interest portion of the loan. It can be claimed after the loan repayment has begun.

• Purpose: The deduction applies to interest paid on educational loans used for higher education.
• Eligibility: Only individual taxpayers are eligible for this deduction. It is not available to HUF or other types of taxpayers. The loan should be used for the higher education of the individual, their spouse, children, or a student for whom they are the legal guardian.
• Deduction Limit: There’s no cap on the amount you can claim as an interest deduction. You can claim the entire interest paid during the financial year.
• Duration: The deduction can be claimed for up to eight years, beginning with the year in which interest repayment begins.
• No Limit: Unlike other deductions, the Section 80E exemption has no specific limit. You can claim a deduction for the actual interest paid during the fiscal year
• Loan Source: Loans from friends and family do not qualify. You must take loans from a bank/financial institution or an approved charitable organization to qualify.

Impact of education loans on tax breaks

Loan Repayment and Tax Planning: Consider the timing of loan repayment. If possible, align it with your income levels to maximize tax benefits. Moreover, you can combine your interest deductions with other tax-saving options like Section 80C (for principal repayment) and Section 10(14) (for scholarships).

Reduced Taxable Income: By claiming the interest deduction, your taxable income decreases. This can lead to lower tax liability. It effectively reduces the out-of-pocket cost of the loan, making education financing more manageable.

Financial Freedom: Education loans allow you to pursue your dreams without draining your savings. You can focus on learning while the tax benefits take care of the rest.

Home Loans: Building Your Dream with Tax Breaks

Let’s discuss the tax deductions available under Sections 24(b), 80C, 80EE, and 80EEA to help you save money on your home loan repayment.

Tax Break on Home Loan Interest 

• Section 24(b) allows you to deduct the interest you pay on your home loan. 
• If the property is self-occupied, you can claim up to ₹2 lakh per financial year. 
• The entire interest component is deducted from your rental income if you rent out the newly purchased home.

Principal Repayment 

Section 80C allows you to claim deductions on the principal repayment of your home loan. The maximum limit is ₹1.50 lakh per financial year.

Joint Home Loan with a Spouse

If your spouse is an earning member and applies for a loan jointly with you, it can be a suitable tax planning strategy. Both of you can benefit from the interest deduction.

Additional tax breaks for first-time homeowners

If you’re a first-time homeowner buying an affordable house, rejoice! Sections 80EE and 80EEA offer extra deductions on interest payments.

Stamp Duty and Registration Fees:

• Under Section 80C, up to ₹1,50,000 in stamp duty and registration fees paid at the time of home purchase can be claimed.
• This deduction helps reduce your taxable income.

Section 80EEA

• Introduced for loans sanctioned between April 1, 2019, and March 31, 2024. 
• Section 80EEA applies to individuals, including first-time homebuyers and those already owning a residential property.
• It provides an additional deduction of up to ₹1.50 lakh on interest payments for affordable housing.

Personal Loans: Indirect Tax Advantages

While personal loans generally do not offer direct tax benefits, there are specific circumstances where you might be eligible for tax advantages.

When do personal loans offer tax breaks?

For Business Expansion

• If you use the personal loan amount to expand your business, the interest paid on the loan can be considered a business expense.

• In such cases, you may be able to claim a tax deduction for the interest paid.

Residential Property

• When you buy, construct, or renovate a residential property using a personal loan, you may qualify for tax benefits.

• The interest paid on the loan can be eligible for deduction under Section 24(b) of the Income Tax Act in India.

Asset Purchase

• The interest paid could be tax-deductible if you invest the personal loan amount to purchase assets (such as gold, shares, vehicles, machinery, or equipment).

• When purchasing an asset using a personal loan, you won’t receive immediate tax benefits in the year of purchase. However, you can add the interest amount to the acquisition cost during the year of selling the asset. 

• Doing so increases the asset’s cost basis, which affects the capital gains calculation. The interest paid on the personal loan is then subtracted from the capital gains earned from selling the asset, reducing tax liability.

Category	Tax Treatment	Impact on Borrower	Tax Limits
Business Expansion	The interest paid may be considered a business expense while calculating profits	Reduces the taxable income	No specific limit( based on actual interest paid)
Home Purchase/Renovation	Eligible for deduction under Section 24(b).	Reduce the out-of-pocket cost of home improvement.	Maximum deduction of ₹2 lakhs for self-occupied property.
Purchasing Assets	Interest paid on a personal loan may be tax-deductible	Increases the cost basis of the asset for capital gains calculation.	No specific limit ( based on actual interest paid.

Car Loans for Tax Breaks

Now, let’s find out how businesses can claim tax deductions on car loans. 

Business Use:

• If you are a self-employed professional or a business owner, you can use a car loan to purchase a vehicle for commercial purposes.
• The key benefit lies in deducting the interest component of the car loan from your taxable income.

Here’s how it works:

Suppose you buy a car for your business, and the loan interest paid during the year amounts to ₹2.4 lakhs.

If your taxable business profit is ₹50 lakhs, you can deduct the interest payment from this amount.

Your total taxable profit for the year would be ₹47.6 lakhs after accounting for the car loan interest.

• Another strategy is to treat the car as a depreciating asset. You can claim depreciation up to 15% annually on the car, even if you don’t take a car loan. This helps you lower your taxable income. 

3 Tips to Maximize Your Tax Breaks

• Obtain an interest certificate from your Bank or financial institution that bifurcates the principal and interest repayments during the financial year.

• To be eligible for the income tax benefit on your loan, you must provide all required documentation when filing an ITR. So, keep a copy of all important documents, including expense vouchers, auditor reports, bank certificates, etc., handy.
• Avoid defaults on your loans, as they may hamper your credit score, thereby increasing your interest rates. Once a loan turns NPA, the interest deduction becomes restricted. 

The Bottom Line

If your home loan was rejected because the property offered as security was unacceptable to the bank, you may need to take out a personal loan to buy a house. You may also find that you are unable to obtain an education loan for your son in time and must take out a personal loan instead.

In such cases, we assume that personal loans provide no direct tax benefits and opt out of the tax savings. This article goes into detail about all four types of loans that can help you save money on taxes, as well as sections of the IT Act. 

Furthermore, you now know you can still claim tax breaks on personal or car and home and education loans, reducing your taxable income. So, keep track of your loans to avoid interest and other charges and claim your rightful tax benefits.

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