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Loans as tax saving instruments

Monday, 3 February 2014 - 1:24pm IST | Agency: dna
A glance at the various benefits you can avail of while repaying them.

While taking a loan allows you to fulfil requirements like buying a house or financing your child’s education, the repayment of this loan along with the interest levied on it does affect your monthly as well as annual finances for other expenditures. However, there is an additional beneficial side to  loans which is the tax saving angle.

The Indian Government allows tax benefits for individuals who are repaying loans and these benefits vary according to the type of loan taken. As per different sections of the Income Tax Act, 1961, loans can be used as tax saving instruments as well.
Home Loans
When taking home loan for purchasing a property, an individual is eligible for tax deductions on both principal amount as well as on the interest that is paid for servicing the loan.

Deductions on Principal Amount
Tax benefits for the principal loan amount as defined under Section 80C of the Income Tax Act, 1961 allows a maximum deduction of Rs 1,00,000 and this amount is inclusive of other tax saving investments as well. These deductions are applicable only once the construction of the property is complete and not for the time period during which the property was under construction.

But if you have availed tax benefits on a property and transferred its ownership before 5 years from the date of acquiring, then the tax amount saved during the financial years when the property was under your ownership will be considered void. That amount will now be considered as a part of your taxable income and you will have to pay tax on that amount accordingly.

For those who invest in under construction properties (e.g. – Flats in township projects) whose values are less than the basic value once the project gets completed, they also have to pay service tax on the loans taken to acquire the property.

Note that the basic value here is the actual market value for the sale of a residential flat once the construction is complete.

The only exception for getting exemption from this service tax is in cases where the property in question is a single residential unit or up to 60 square meters. This exception is included under the “Scheme of Affordable Housing and Partnership” as devised by government bodies namely “Ministry of Housing” and “Urban Poverty Alleviation” and strategised under National Urban Housing & Habitat Policy (NUHHP), 2007 and is in effect since April 1, 2009.

Deductions on interest amount
Section 24 of the Income Tax Act has certain provisions that allow tax benefits on the interest paid on the principal loan amount.

For construction or purchase of a new property, you are eligible for deduction of up to Rs. 1.5 lakh for the interest amount paid. If the property construction was completed within 3 years from the end of the financial year in which the loan was issued. If a property is not self-occupied, then there is no upper limit on this tax deduction.

For renovation or reconstruction of a self-occupied property, a maximum of Rs. 30,000/- is deductible from tax. However, if there was a loan taken on or after April 1st,1999 for the construction of a property with completion within 3 years from end of the financial year when the loan was issued, then this benefit can be availed up to Rs. 1.5 Lakhs annually.

Car and Personal Loans
For salaried individuals, no tax benefits are available if you have taken a car loan. Deductions from payable tax can be availed only if you are self-employed or a businessman and you declare the profit or capital gains earned from your work or business or you purchase a vehicle for business use. In that case, you get exemption on the interest as well as depreciation of the vehicle.

For example, borrower A, who works in a private software company, has bought a brand new car to commute to and fro from home and work. He might be reaping the convenience of owning a four wheeler but he will not get any tax benefit for taking a loan to purchase it. On the other hand, a small time businessman who has a textile store has also bought a new car. Now if he declares his earnings as deductible under section 80C, he will be able to include the interest paid for his car loan for tax exemption.

Another way of getting tax exemption for your vehicle is by financing it through a home loan. However, this umbrella loan puts your property at the highest risk in case of any payment defaults. For personal loans, deductions are applicable only for a declared business and its earnings; or for the interest on loan repayments used for property construction.

While this is a broad overview, it is useful to be informed about loan tax benefits if you are going to take a loan, or if you are already repaying one. Being aware can be beneficial in saving on your taxes.

Educational Loans
Unlike home loans, only the interest on repayments is applicable for deduction and not the principal amount. As defined in Section 80E of Income Tax Act,1961, this deduction is applicable only for an individual for higher education with no fixed upper limit.

Here, higher education can be defined as any course that you pursue after Senior Secondary School Level in India or abroad. It is important to understand that the education loan should be taken from a financial or approved charitable institution to be eligible for tax benefits and you can avail this tax benefit for a maximum period of 8 years or full loan repayment period, whichever is applicable. For example, if you have paid off your education loan within 5 years of the course completion, deduction benefit can be availed only for that time frame and not beyond that.

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