When we think of Loans, the few ones that comes to our mind immediately are Home Loan, Auto Loan, Personal loan, Business loan etc. Loans provide us with immediate financial support and facility to meet our requirements like buying your dream home, a new car, home renovations etc. Loans also provide us with various tax benefits under the provisions of the Income Tax Act 1961 (“Income Tax Act”) as amended from time to time. Even though some loans provide tax benefits/rebates on the loan that we take upon its repayment, not all loans provide tax rebates. In this blog we will understand the various tax rebates that an individual can get on different types of loans under the provisions of the Income Tax Act
1) Tax Rebates on Home Loans:
One of the most important type of loan that individuals prefer is a Home Loan. The Home loans are generally for long duration ranging from 10 to 20 years and contains two repayment components i.e. the Principal amount and the interest amount. The benefit/rebates that an individual can get for the Financial Year 2021-22 if he is repaying his home loan on time are as follows:
- U/s 80 C of the Income Tax Act for self-occupied/ let out properties rebate upto a maximum of 1.5 lakhs can be claim every year from a taxable income on principal repayment.
b) Under section 80EE, the upper limit for tax deductions is Rs. 3.5 lakhs. Further the parameters that should be met to claim deduction under 80 EE are
- Deduction on income tax can only be claimed on the first house only
- Deductions can only be claimed if the value of the house does not exceed Rs 50,00,000.
- The deduction is not going to be available to claim if the home loan taken exceeds Rs.35,00,000.
- Home loan must be sanctioned by a recognized financial institution like a bank or a housing finance company.
c) Section 24 of the Income Tax Act provides rebates on tax towards interest paid on home loan when the loan is taken for purchase, renewal, reconstruction, repair, or construction purposes upto maximum amount of Rs.2,00,000
2) Tax Exemption on Car/Auto Loans
The Income Tax Act does not provide for any tax benefit to customers who avail car or auto loan for purchase of vehicle for personal use. However, when the Car Loan is used by self-employed individuals for using it for commercial purposes, then such individuals are eligible for tax deduction under section 80C of the Income Tax Act
3) Tax Exemption on Personal Loans
The Income Tax Act provides that in case where the Personal loan is availed for any business purposes, the customers are eligible for tax exemption. Other than this, Personal Loan does not offer any form of tax rebate to customers.
4) Tax Exemption on Education Loans
The Income Tax Act Section 80 E provides the following provisions with respect to tax exemption in case of Educations loans
- Tax benefit is applicable only if the education loan is taken from a financial or approved institution
- Tax deduction can only be claimed only on the interest paid towards education loan
- Tax benefit on education loan can be availed for a maximum of 8 years
- There is no limit on the maximum interest amount that you can claim tax deduction on
- The benefit can be claimed by the parent or the child, that is the person who pays the loan can claim the benefit.