Four Types of Loans that Help you Avail Tax Benefits

Loans provide a massive monetary boost to borrowers, help them cover their multifarious needs, and act as a huge financial backup. In India, it is quite easy to apply for a loan at a nominal interest rate for a longer tenure. The benefits of availing of a loan range from getting enough money to invest in your business venture to covering up your personal needs. There are several other benefits of getting a loan and out of them, tax benefits stand at the top. 

Since we all pay taxes to the government, it is also our right to avail of tax benefits from different credit systems. However, not all loans give you tax benefits, only four of them do. They are education loans, home loans, car loans, and personal loans. These loans provide different tax benefits to different lenders, depending on their credentials and the ability to repay them. 

What are the tax benefits that can be obtained from these loans? Read the article further to know what tax benefits these loans provide. This article discusses the provisions and different tax benefits that can be availed from these loans. 

What is an education loan and what tax benefits does it provide? 

Education, being one of the best investments that hold the potential to give the best returns, also requires to be well financed. It can help you rise in your career, improve your standard of living, overcome distress, and set a financial goal. And to get a good education at a prestigious Institute, you might require an education loan which will help you cover all your education-related expenses. 

There are various schemes and scholarships that allow you to avail of an education loan at a nominal interest rate. Besides that, an education loan provides certain tax benefits to individual borrowers as well. These benefits come under section 80E:

• Section 80E:

Under Section 80E of the Income Tax Act, 1961, a provision of tax deduction is available for up to 8 years. There will be a deduction of tax until the education loan is repaid. This means if you pay the loan completely within 5 years, the tax deduction will be allowed for 5 years and not 8 years. 

It is also important to note that there is no limit on the maximum deduction amount from the loan. And repaying the principal amount is not going to make you eligible for availing the tax benefit. 

• Lower TCS (Tax Collected at Source) 

The benefit of lower TCS can be availed of an education loan if you go for overseas education. If the budget is above 7 lakhs, then a TCS will be applied at a rate of about 5% according to the Budget of 2020. Similarly, if you avail of an education loan from a lending institution in India, you will reduce the TCS rate to 0.5%.

What is a home loan and what tax benefits can be availed of it? 

Having a home is not only a financial goal but also gives you a sense of accomplishment. However, with the increasing market price of properties, having a home with your own money seems like a tough nut to crack. As a result, a home loan helps you get the desired amount at a low-interest rate for a longer tenure. A home loan is financial assistance that helps you to buy, construct, or renovate your home. 

Besides that, just like an education loan, a home loan provides you with several tax benefits. 

• Section 24(b) 

Under section 24(b) of the Income Tax Act, 1961, a borrower is eligible to claim a tax benefit of up to INR 2 lakhs per year on the interest amount, provided that the home is a self-occupied property. 

• Section 80 C:

You can also claim a deduction of a sum of 1.5 lakh on the principal amount of the home loan per financial year. 

• Section 80 EEA:

 If you happen to be a first-time borrower, you can claim an additional tax deduction of about 1.5 lakh on the gross total income on the interest amount per financial year including the 2 lakh tax concession under Section 24(b). This means you can claim a tax benefit of about 3.5 lakhs per financial year on the interest amount. 

What is a car loan and what are some of the tax benefits it provides? 

 Just like a home loan, a car loan is applied to buy a car at an interest rate for a fixed tenure. Like education loans and home loans, A car loan also has some tax benefits. 

• Section 80 EEB:

Under Section 80 EEB of the Income Tax Act, 1961, you can claim a tax deduction of about 1.5 lakhs on the interest amount per financial year. 

• Section 32:

Under section 32 of the Income Tax Act, 1961, further taxable benefits can be availed of from your car loan. For example, if you buy a car before September 30, you can claim depreciation of about 15% of the price of the vehicle. Whereas, for buying the same car from October 1 onwards, you claim depreciation up to 7.5% of the price of the car. 

What is a personal loan and what are the tax benefits it provides? 

Similar to that home loans, education loans, and car loans, a personal loan is financial assistance that helps you meet your requirements like financing a wedding, making a down payment, etc. A personal loan also provides certain tax benefits to the borrowers, however, these benefits are indirect. 

• Section 24(b) :

Suppose you want to use the loan amount obtained from the personal loan to repair or renovate a house. In that case, you can avail of some tax benefits under Section 24(b) of the Income Tax Act, 1961.

• Section 43:

Similarly, if you spend the personal loan amount to finance your business, then under section 43, you can claim a deductible expense. 

Wrapping it up

There are only four types of loans that provide you avail of tax benefits: Education Loans, Car Loans, Home Loans, and Personal Loans. In an Education Loan, a borrower can claim a tax deduction of up to 8 years with an additional benefit of TCS. In the case of home loans, you can obtain tax benefits under Section 80 C, 80 EEA, and 24(b). In car loans, under Section 80 EEB and 32, tax benefits can be obtained, whereas for personal loan tax benefits, there is no direct tax. If you want to know further about these loans in detail, you should visit Piramal Finance.