Loans, when managed well, are great enablers to realise our dreams. Loans like a home loan help you build crucial assets, while a personal loan comes to your rescue during a financial emergency. And some of them help significantly in reducing your income tax liability too.
So, let’s take a quick look at the loan products that come with tax benefits.
A home loan is possibly the biggest tax-saving instrument out there. But before we discuss them, it’s important to underline that any loan consists mainly of two components – principal and interest. If you’re servicing a home loan, you can claim tax deduction of up to Rs. 1.5 lakh under Section of 80C of the Income Tax Act on the principal repayment. Section 80C is the most popular tax-saving category for taxpayers, and your home loan principal will majorly help in maximising the tax benefits under this category if your other tax-saving measures don’t reach the Rs.1.5 lakh mark.
Then comes the interest component of your home loan, which is significantly high during the initial years of the loan tenure. But under Section 24B, you can claim further tax deduction of up to Rs. 2 lakh on the interest payment of your home loan.
However, it is important to note here that you can claim a tax deduction on the home loan for an under-construction property only after its completion. You are allowed to claim deductions on the interest only if you have paid up in five equal instalments over five years starting the date of possession. Additionally, you can also claim a deduction for stamp duty and registration charges under the prescribed limit of Rs 1.5 lakh under Section 80C. This is allowed only in the year in which expenses are incurred.
That’s not all. There are a few other tax incentives that can be claimed by only eligible home loan borrowers. If the loan for your first home got sanctioned in FY2016-17 and the value of your property is not more than Rs. 50 lakh and your home loan amount doesn’t exceed Rs. 35 lakh, you can claim an additional tax deduction of up to Rs. 2 lakh on your interest payments under Section 80EE.
On the other hand, if the loan for your first home got sanctioned after March 31, 2019, and the value of your property according to the stamp duty calculations doesn’t exceed Rs. 45 lakh, you can claim additional tax deduction of up to Rs. 1.5 lakh on the interest component under Section 80EEA. However, the carpet size of your property also needs to be less than 648 sq. ft. if it’s located in a metro and less than 968 sq. ft. if it’s located in any other place for you to claim this benefit. What’s best is Finance Minister Nirmala Sitharaman in her Budget 2020 speech proposed to extend the deadline to avail tax benefits under Section 80EEA by one year to March 31, 2021. That means if you’re planning to take a home loan, you might want to finalise it before March 31, 2021, to claim additional tax benefits.
Top-Up Home Loan
Banks also offer top-loan to their existing home loan borrowers for house renovations and repairs. Like a regular home loan, you can seek tax deductions on interest payments of Rs. 30,000 if the top-up loan has been taken for repairs and alterations. You cannot claim deductions for reasons other than repairs and renovations. To claim this deduction, you will have to furnish all the documents related to repairs and renovations. As per the tax norms, the interest payment deduction claimed here will be within the limit of Rs 2 lakh under Section 24. So your top-up and regular loan interest payment should be within the overall limit of Rs. 2 lakh. The amount above the prescribed limit is carry forwarded up to 8 years.
A personal loan is an unsecured financing facility, so you do not need to pledge your collaterals to avail this loan. They come in handy during an unannounced emergency and are easily available if you have a stable income and a good credit score. Although there are no defined sections in the tax law for personal loans, you can seek tax benefit depending on the purpose of your personal loan. Therefore, you can claim a tax deduction if you have availed a personal loan to buy or renovate your house, to fund higher education expenses, debt consolidation, medical emergency, vacation expenses and business expansion. The deductions will be applied as per the tax norms of each head. For instance, if you have taken a personal loan to buy a house, you can claim tax deductions under Section 80C and 24. However, you would be required to furnish relevant documents to claim deductions available.
An education loan can also help you get enormous tax benefits. Tax deductions for an education loan are covered under Section 80E of the I-T Act. However, you can claim the tax deduction benefit for the interest component of the loan only and not the principal amount. This tax exemption can be claimed only by an individual taxpayer (and not by any other type of taxpayer like a Hindu Undivided Family) for an education loan taken for the higher education of self, spouse or children or for a student for whom the individual is a legal guardian. The best part is you can claim tax deduction on the full interest component of your education loan paid in a year as per Section 80E as there’s no maximum limit.
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