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Loans and tax benefits

Deductions are available on various types of loans. In this article, the author discusses various tax benefits available in respect of different types of loans.

Loans and  tax benefits


Balwant Jain

Deductions are available on various types of loans. In this article,  the author discusses various tax benefits available in respect of different types of loans.

Deduction for home loans

Under Section 24(b) of the Income Tax Act, you get a deduction for interest on money borrowed to buy, construct, or repair or reconstruction of a residential as well as commercial property. Even the processing fee or pre-payment charges paid are also treated as interest for income tax purpose and thus can be claimed. The money can be borrowed from anyone, including your friends and relatives, as long as you are able to prove its actual use for the specified purpose.

The quantum of deduction will depend on whether the property has been let-out or is used for own residence. For a self-occupied property, the deduction is restricted to Rs 2 lakh but for a let-out property, you can claim full interest. If you have more than one self-occupied houses, you have to select one house as self-occupied and the other house/s is treated as let-out. In such a case, you have to offer notional rent for taxation on such deemed to have been let-out property and can claim full interest payable.

For an under-construction property, you can claim interest only from the year when construction is completed and possession taken. The total of interest paid during the construction period can be claimed in five equal instalments beginning from the year of completion of construction. This is within the limit of Rs 2 lakh in case of self-occupied house property. However, in case you sell such property before completing five years after taking possession, the claim for the remaining years is lost.

Under Section 80 C, an individual and  an HUF can claim a deduction up to Rs 1.50 lakh for principal repayment of a home loan taken for the purchase or construction of a residential house along with other eligible items like  life insurance premium, NSCs, EPF, ELSS and stamp duty and registration charges etc.

This deduction can only be claimed for repayment of home loan taken from specified entities such as banks and housing finance companies etc. 

Rebate on education loan

The income tax laws allow you to claim rebate on interest paid during the year on education loan taken for higher education for eight consecutive years but no deduction is available for repayment of the principal amount.    The deduction is available on the basis of actual payment of interest. Therefore, if you pay the interest for earlier years in a single year, you will get the deduction in respect of all the actual interest paid during the year.

In case you have opted for moratorium during the education period, the eight-year period shall start later. However, if your loan tenure exceeds eight years, you cannot claim the deductions beyond the consecutive period of eight years. It is, therefore, advised that you should plan to repay the education loan within eight years.

The deduction is available only to an individual for education loan taken for pursuing any government-recognised course after Senior Secondary Examination or HSC as is popularly known. Even part-time course or a diploma course shall also qualify for the purpose of claiming interest deduction if the institution imparting such course is recognised.

You can claim deduction if the loan has been taken for the study of yourself, your spouse, child or any other child for whom you are a guardian.

It is advisable to claim the benefit of interest for such a loan in the income tax returns of the person who falls in the higher tax slab. The parents can take the benefit of interest deduction in case the interest is agreed to be paid during continuance of the education. In case the person for whom the loan is taken falls in higher tax slab, he can pay the interest and claim it in his income tax returns.

Therefore, it is advisable to take an education loan in joint names of parent and the student so as to have the flexibility for claiming the interest.

The loan should be taken either from a financial institution or any approved charitable institution.

Car loan

Generally no tax benefits are available to a salaried person in respect of any car loan. However, in case the vehicle for which the loan is taken is used for the purpose of your business or profession, you can claim the interest in respect of such auto loans as well as the deprecation to the extent the same is used for your business.

Personal loan/loan on credit card

The income tax per se does not allow any tax benefit in respect of any personal loan or loan taken on credit card. However, in case the loan taken has been used for a purpose like paying for margin money for house or for buying a business asset and if you are able to establish such usage, the interest so paid can be claimed.  However, in my opinion, the benefit for repayment of such personal loan cannot be claimed under Section 80 C as the money borrowed is not for specific purpose of buying or constructing a house.

The writer is CA, CS and CFP. Currently, he is working as Company Secretary with Bombay Oxygen Corporation Limited. The views expressed in this article are his own

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