Income Tax Act, 1961: Tax Query and Tax Benefits for Interest Paid on Loans

Owning your own vehicle or home can be a great source of comfort for many. Since, these are expensive products to own, many people resort to taking a loan from a bank or financial institutions to help with funding. In many cases, education loans are also availed by people looking to continue their education and ensure a brighter future. Thus, loans can be availed to cope with a wide range of expenses. However, in India, where tax filing is a fiscal duty of every citizen, it can be beneficial to understand the tax implications of availing loans. A tax query that is often raised to check whether tax benefits are available while repaying such loans.

Different sections of the Income Tax Act (ITA), 1961, refer to the various tax benefits available to those availing home loans, education loans or even personal loans. To avail the maximum amount of benefits, it can be advantageous to study these benefits and file the appropriate documents in time to avail these benefits. 

Tax Benefits on Home Loans

Under the ITA, Section 80EE pertains to the income tax benefits that can be availed on the interest paid for a home loan. The benefits in each financial year are capped at Rs. 50,000. On the plus side, these tax benefits are available to you for each year until you have finished repaying the loan. This is only applicable for borrowers who have only one registered home property at the time of the loan being sanctioned.

Apart from Section 80EE, there are several other sections under the Income Tax Act which provide tax benefits to individuals who have availed home loans. Tax deductions are also available under the newly-introduced Section 80EEA, but these only apply to individuals who have availed a loan for affordable housing projects. Furthermore, the applicant cann0t be a beneficiary of the tax deductions under Section 80EE. 

Section 24 of the same act allows homeowners to claim a tax deduction on home loan interests of up to Rs. 2 lakh. This is only valid if the house remains vacant, or is occupied by the owner or his family. On the other hand, the entire home loan interest qualifies for tax deductions if the property has been rented out. Certain conditions are applicable under this section as well. For instance, if the loan was availed on or after April 1, 1999, and if the property has not been purchased or completed within a period of 5 years from the end of the financial year in which the loan had been availed, the tax deductions available on the loan interest amount is capped at Rs. 30,000. 

Section 80C of the Income Tax Act pertains to the tax deductions on the principal repayment amount of the loan, and for other expenses such as stamp duty and registration charges incurred on purchase of the property. The deductions available on the principal repayment amount, however, are capped at Rs. 1,50,000, if the loan was availed to buy or construct a new property. Additionally, you cannot sell the property within 5 years of its purchase or the tax deductions will be revoked. The tax deductions available on the expenses incurred on transfer of the property to your own name have to be claimed in the same year in which the expenses were made. 

Tax Benefits on Education Loans

For any tax query regarding education loans, borrowers can refer to Section 80E of the Income Tax Act. The tax benefits here are available to all borrowers who have availed a loan from a charitable or financial institution or bank to pursue higher studies, both in India or abroad. Section 80E allows for tax deductions on the interest that is payable for the loan availed for pursuing higher education. Though the tax benefit cannot be availed on the principal amount paid, it can be availed for the entire amount that has been paid as interest. It is also important to note the other criteria that is applicable for availing tax benefits on education loans. For instance, loans availed from family members or friends to meet expenses pertaining to pursuing a higher education are not eligible for tax benefits. Similarly, education loans applied for any non-banking financial company (NBFC) may not necessarily be eligible for tax benefits. Only NBFCs that have been notified in the Central government’s official Gazette as ‘Financial Institutions’ can provide education loans that are eligible for tax deductions.

Tax Benefits on Personal Loans

Most people hold the belief that no tax benefits can be availed on personal loans. However, in certain cases, deductions are available to taxpayers. For instance, if the taxpayer opts for personal loan for business purposes, tax deductions can be claimed. 

Benefits on loans are just some of the deductions available to taxpayers. Taxpayers can invest in a multitude of options to reduce their tax liability significantly. One can avail tax benefits not only on the premiums paid for life insurance policies, but also on the payout of the death benefit. You can browse the website to learn more about the various Term Insurance Plans and Mera Term Plan offered by PNB MetLife.

The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible.