How Loans Can Help You Save on Income Tax
Ajay, 34, took a loan to buy his second house. While filing his returns, he was eligible for an income tax rebate on his Home Loan for a second house. This was because of the housing loan tax exemption 2015–16 of the Income Tax Act.
Loans are an excellent way to reduce your tax burden. Let us look at how loans can help you save on income tax.
Which Loans Offer Tax Benefits?
Home Loans, educational loans, car loans, and even personal loans come with tax benefits.
What Tax Benefits Should You Expect on Home Loans?
A simple online search throws up many results on ‘tax benefit on Home Loan 2016’. But the important point to note for the housing loan tax exemption 2015–16 is this:
Under Section 80C, you may claim exemption on the principal part of the Home Loan. A maximum exemption of Rs 1.5 lakh is allowed.
Stamp duty and registration fees are exempt up to Rs. 1.5 lakh. This holds only in the year these payments take place.
Section 24 of the Income Tax Act provides a deduction on Home Loan interest repayment. The limit on this is Rs 2 lakh per year.
What About Joint Home Loans?
In a Joint Home Loan, the same deductions apply. Both co-borrowers can claim deductions. But the deductions claimed will depend on their ownership share in the property.
Any Benefits for First Time Home Buyers?
Section 80EE of the Income Tax Act has an additional inventive for first-timers. You receive a further deduction of Rs 50,000 on the interest paid. But this is valid only for the financial year 2016–17.
What is the Personal Loan Tax Benefit?
The personal loan tax benefit is available under Section 24. You get a tax deduction of up to Rs 2 lakh on interest payments.
Is This Valid for All Personal Loans?
No. The deduction is available only for house-related expenses. It applies on loans taken to pay a down payment for a house. It also holds for loans taken for home repairs, renovation, or reconstruction.
Does a Car Loan Help You Save Tax?
Yes and no. Car loans offer tax benefits for self-employed individuals and businessmen. There is no benefit for salaried people.
What are the Available Benefits?
The interest on car loan repayments is tax-deductible.
Do Educational Loans Offer Tax Benefits?
Yes. Under Section 80E, the interest paid on education loans is tax-deductible. The benefit is available for the term of the loan but for a maximum of eight years.
What Happens in Case of Early Payment?
Say, you pay off the loan in five years. Then the tax benefit is available for those five years only.
Home Loans offer the most scope for saving tax. Say, Ajay’s annual loan repayment is Rs 5 lakh. Here the principal amount is Rs 1 lakh, while the interest is Rs 4 lakh. In this case, the entire principal amount is exempt. In addition, he claims exemption of Rs 2 lakh on the interest repaid. So, under the housing loan tax exemption 2015–16, Ajay saves Rs 3 lakh.
Yes, the liability of buying a house is huge. But these are long-term loans. That means, you can claim deductions on the repaid interest year after year. And what if you miss an EMI payment? No worries. You can still claim a tax benefit.