Tax rebates are certainly an added advantage for several types of loans. Education loans, home loans, auto loans, and personal loans are among them. However, it becomes extremely important to understand that while some loans carry a tax benefit along with then, not all loans do.
Any form of loan, no matter how small, is a major financial risk for any customer. Home and car loans, for example, have long repayment terms, making repayment a daunting and tedious process on a regular basis. The Government of India has understood this indeed for free-flowing credit within the economy, and has come up with different tax benefits as a measure to increase the general population’s standard of living.
To know more about Income Tax 1961, how to maximize savings, check here.
Let’s take a look at three significant loans that are eligible for a tax refund under the Income Tax Act of 1961.
1. REPAYMENT OF EDUCATION LOANS: DEDUCTIONS UNDER SECTION 80E
- Higher education, whether in India or abroad, is a significant financial investment these days. When faced with a financial emergency, an education loan from a recognized institution will help.
- It may be used to cover expenditures such as tuition, books, housing, transport, research materials, and other academic-related costs.
- Only the interest part of the loan, not the principal, is liable for a tax deduction.
This deduction is in addition to the tuition fee deductions of up to Rs 1.5 lakh that a person may claim under Section 80C.
- Tax incentives on school loans are available for up to eight years.
Borrowers are usually given a one-year moratorium period before they must begin repaying their loans.
2. DEDUCTIONS/SUBSIDIES UNDER SECTIONS 80C, 24, 80EE, 80EEA, AND CLSS FOR HOME LOANS
A home loan will assist both self-employed and salaried individuals in realizing their dreams of homeownership. But did you know that the loan will help you save money on your taxes?
The government’s tax breaks will significantly reduce the financial burden on home buyers. The Income Tax Act of India provides for interest and principal part exemptions.
- Section 80C: Under Section 80C of the Income Tax Act of 1961, borrowers can seek a tax refund of up to Rs.1.5 lakh on principal repayment.
To qualify for this deduction, the house must be owned for at least 5 years. Both borrowers can avail a deduction of up to Rs 1.5 lakh for joint home loans.
- Section 24B: On the annual interest of the EMI charged, a deduction of Rs 2 lakh may be claimed under Section 24B. Both parties to a joint home loan can demand a deduction of Rs 2 lakh each.
- Section 80EE of the Tax Code: First-time homebuyers are the focus of this segment. Homebuyers have two options for seeking deductions under section 80EE.
- Option 1: Homebuyers can claim an additional tax deduction of up to Rs.50000 under Section 80EE if the loan amount is less than Rs.35 lakh and the property cost is less than Rs.50 lakh.
- Option 2: Under section 80EEA, homebuyers can deduct up to Rs 1,50,000 for homes sanctioned on or after April 1, 2019. The house should not be worth more than Rs 45 lakh, and the taxpayer should not have taken advantage of section 80EE deductions.
- Credit Linked Subsidy Scheme (CLSS): First-time homebuyers can get a tax break of up to Rs 2.67 lakhs under the Pradhan Mantri Awas Yojana.
3. PERSONAL LOANS: INDIRECT DEDUCTIONS BASED ON LOAN USAGE
Personal loan, as we all know, are ideal for getting you out of a financial bind. They’re easy to get because they’re unsecured, but they’re a little pricey because lenders tend to charge high-interest rates.
You can look here to know more about claiming benefits while taking a personal loan.
Many people ask whether they can seek a tax refund on a personal loan because it is not considered part of their income. The tax gain of personal loans is dependent on how they are used. Personal loans for various reasons, such as college, home purchase or renovation, business expansion, and so on, are eligible for tax deductions.
- Under section 24(b) of the Income Tax Act, tax deductions on interest charged on a personal loan can be claimed if the money is used to pay for a down payment on a home or renovations.
- When borrowed money is used for a commercial purpose or to buy an asset, the cost of acquisition is increased by the interest charged. As a result, capital gains are reduced, lowering the tax liability.
As you can see, the three loans listed above not only provide cash flow when you’re in a financial bind but also provide tax relief. However, it’s important to note that having a loan, regardless of the sort, is a significant commitment that should not be taken lightly. It is, after all, borrowed money that must be repaid.
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