Loans That Can Give You Great Tax Benefits

Loans That Can Give You Great Tax Benefits

Loans can bail you out during an emergency, and if you manage your finances well, they don’t have to be a burden over a period of time. In fact, you can even get tax benefits from certain loans. As per the Income Tax Act, 1961, certain tax benefits that have been provided to reduce the burden of tax repayment on borrowers. Let’s look at some common loan options that offer tax benefits.

Home Loans

A Home Loan is one of the biggest loan liabilities that a person can avail. Although the loan amount and tenure can be high, the tax benefits that a customer reaps on a Home Loans are also pretty good.

How do you benefit?

Anyone availing a Home Loan benefits in two ways. The amount paid towards the principal repayment qualifies for a tax deduction under Section 80C of the Income Tax Act. The maximum deduction available is Rs. 1.5 Lakh.

Another benefit comes in the form of a deduction for the amount paid as interest on the Home Loan. The maximum amount you can claim as interest deduction from your income for a self-occupied property is Rs. 2 lakhs.

In case the loan is jointly availed between you and your spouse, the deduction of Rs. 2 lakhs can be claimed by each of you.

Buying a second home?

If you buy more than one property, only one house can be counted as a self-occupied property. All other houses are deemed to be rented out (even if they are not rented out).

In case of properties that are deemed to be let out or are actually let out, the entire amount paid as interest was earlier eligible to be considered for deduction under Section 24B of the Income Tax Act.

Under-construction property

It is widely known that you can start claiming tax benefits on your Home Loan only after the construction is completed and you take possession of the property.

But wait. Did you know that you can also claim tax deductions on the instalments that you paid while the property was being constructed? Well, you can. You are allowed to claim deductions on the interest paid in five equal instalments over a period of five years from the year of possession.

Note: In case you’re thinking of selling your house within five years of buying it or from the date of taking the loan, say goodbye to your tax benefits. The benefits will be reversed and you will need to pay extra tax on your annual taxable income.

Education Loans

With various measures being put into practice by the government to promote higher education, people have become aware and ready to even venture out of the country to study. However, the cost of education, especially professional courses like medicine and engineering is still quite high both in India and abroad.

This is when education loans come into play. Education Loans pave the way to your future.  But to be eligible for tax benefits on an Education Loan, the loan should be availed from a scheduled bank or a notified financial institution.

An Education Loan can also be availed for self, spouse or children. The legal guardian of any student can also avail this loan. This way, parents or spouses can also claim a deduction for payment of interest.

Section 80E of the Income Tax Act offers tax benefits to applicants availing Educational Loans for the purpose of pursuing higher education. However, just like with a Home Loan, only the interest amount paid towards the repayment of the loan is eligible for a deduction, and not the principal amount.

Also, there is no upper limit fixed for interest repayment. Tax benefits can be availed for a maximum of eight years or on the loan repayment term, whichever is applicable. For example, if the entire loan is repaid in six years, then the tax benefit is also limited to that term.

Note: Almost all education loans in India come with a moratorium period which is usually one year or six months after the student gets a job. Interest during the moratorium period gets accrued and is taken into account when the final monthly loan instalment is calculated by the lending bank.

Personal Loans

A Personal Loan is a type of unsecured loan offered for a plethora of requirements. Unlike other types of loan, a Personal Loan is an open-ended loan. It’s not important for the borrower to state the purpose of taking the loan. Compared to other types of loans, a Personal Loan is a lot easier to obtain

The most common reasons for availing a Personal Loan are:

  • Medical emergency
  • Vacation expenses
  • Home renovation/improvement
  • Higher education
  • Debt consolidation

Not many know that Personal Loans come with tax advantages (depending on what you use it for) and, hence, they tend to miss out on this benefit.

Ordinarily, the principal amount and interest charges paid towards a Personal Loan cannot be deducted for tax exemptions, but you can claim deductions if you are using the Personal Loan for home renovation or to pay the down payment on a Home Loan.


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