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Tax Benefits of 3 Common Loans in India

Guest 
on 27 February 2020

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Loans not only serve as an ideal option to arrange for funds in times of financial need, but may also have some tax benefits associated with them. In the following sections we will discuss how you can save tax when repaying 3 most common loans availed in India - home loan, personal loan taken for the purpose home renovation and education loan.

Tax Benefits of Home Loan

A home loan is usually the longest term borrowing that an individual avails during his/her lifetime. Considering the 15-25 year tenure associated with this loan, it is only natural that this loan provides the widest range of tax benefits among different types of loans. The following are the highlights of these benefits:

l. Under Section 80C - Tax deduction of up to Rs. 1.5 lakh can be claimed for a loan taken for the purchase or construction of a house property. This includes both the principal loan amount and the miscellaneous charges such as stamp duty and registration fees. It is notable that to claim this deduction, the property should not be sold prior to completion of 5 years from the end of FY in which possession for the property was obtained.

lI. Under Section 24(b) - Interest on home loan up to Rs. 2 lakh can be claimed as an income tax deduction under this section. It is only valid when the acquisition or construction of the house is completed within 5 years from the end of the FY in which the loan was taken. It should be noted that the losses that can be covered the head of 'House Property” are also limited to an upper limit of Rs. 2 lakh.

lII. Under Section 80EEA - This is a special tax deduction up to Rs. 1.5 lakh that can be claimed on the interest component of a home loan, provided the following conditions are met.

  • Individual is not eligible to claim deduction u/s 80EE.
  • The loan is sanctioned between 1st April'19 to 31st March'20 (as of Budget 2020)
  • Stamp duty value of the residential property does not exceed Rs. 45 lakh.
  • The applicant does not already own any other residential property
Tax Benefits of 3 Common Loans in India

While the best way to find your annual interest payout over the loan tenure is from an amortization schedule provided by the lender, youalso can estimate interest payouts by using a home loan EMI calculator.

Akey factor to remember with respect to home loan tax benefits is thatyearly deduction allowed is equal to the interest actually paid during a FY up to the applicable limit. For instance, if you paid Rs. 50,000 as home loan interest, then the deduction you can claim for will be limited to Rs. 50,000 and not the upper limit of Rs. 2 lakh (u/s 24b) or Rs. 1.5 lakh (u/s 80EEA).

Tax Benefit of Personal Loan for Home Renovation

Yes, even a personal loan can help you claim tax benefit of up to Rs. 2 lakh annually u/s 24(b), but only if the loan has been taken for the sole purpose of home renovation. Under the section, tax deduction of up to Rs. 2 lakh can be claimed on the interest component of such a personal loan. Usually, this type of personal loan is available at a lower interest rate as compared to many other types of personal loans.

However, to claim this deduction, you must you provide a certificate from the lender specifying the amount of interest payable on the personal loan and confirming that it was used only for the purpose of home renovation. The interest component (i.e. income tax deduction benefit) of such a personal loan can be easily estimated using a personal loan EMI calculator while the exact annual payout can be obtained from the lender after the loan has been sanctioned.

Tax Benefit of Education Loan

Education loan not only allows an individual to pursue higher education, but can also help you save on the total tax outgo under Section 80E of the Income Tax Act, 1961. Under existing income tax rules, this deduction is valid on the interest component of the loan only and not the principal. Education loans up to a certain limitcan be obtained as unsecured loan while collateral will be required in case higher amounts are borrowed.

Any amount paid as interest on education loan can be claimed as a deduction at the time of calculating the total income for the assessment year (AY) in which the loan was taken.This tax benefit is applicable forup to 7 years or till the education loan is paid off in full - whichever is earlier. You can check your interest payouts from the amortization schedule provided by the lender or by using an education loan EMI calculator.

Conclusion

While tax benefits can be an add-on benefit of these loans, it is necessary to point out that you should borrow only because of a specific need and not because there is a tax benefit associated with the loan. Additionally, even in view of the tax benefit on the interest paid, it is usually better to pay off loans as soon as possible to reduce the overall interest outgo applicable to the borrowing. This is because, in the long term, the cost of paying interest usually outweighs the tax benefits associated with any loan.


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