One-minute guide: Tax benefit on loans

Jul 13 2016,

 When you take a loan, you need to repay it along with the applicable interest rate. But did you know that you can claim tax deduction on loans depending on where the money is being utilised? Here is how.

Home loans

The equated monthly instalment (EMI) of a loan has two components—principal and interest. You can claim tax deduction against the principal repayment and payment of interest of the loan. These components qualify for tax deduction under two separate sections of the Income-tax Act, 1961. Under section 80C of the income-tax Act, you can claim the principal repayment amount, and the interest repayment amount can claimed under section 24(b).

If you have taken a home loan for purchase of a house, the tax exemption limit on the interest amount differs depending on the occupancy. If you have taken a loan on a self-occupied house, the amount is capped at Rs.2 lakh. If the house is let out, there is no cap on the interest amount that can be claimed.
Do remember that you can only claim a tax benefit once the property is complete. If you buy an under-construction property, you cannot claim the deduction till the property is fully constructed and you get possession.

Personal loans

If you have taken a personal loan and it is used to purchase a house, you can claim tax benefit on it as well. According to Vaibhav Sankla, director, H&R Block India, a tax filing portal, tax laws do not define loans the way banks do; tax laws only consider the purpose of the loan or what it is utilised for. So, the tax laws that apply to home loans will be applicable to a personal loan that is used to finance the purchase of a house, including its down payment. Just like in a home loan, you can claim deduction for the interest payment under section 24(b) and principal repayment under section 80C. As proof, you need to have the interest payment certificate and bank statement.

Education loans

If you have taken a loan to pursue higher education, the interest repayment is tax deductible under section 80E. Higher education includes any course pursued after the senior secondary examination or its equivalent from a recognised school, board or university or any other authorised authority.

The loan can be taken for yourself, spouse or children. And it has to be availed from a bank, or financial institution, or an approved charitable institution.

Do keep in mind that unlike in a home loan or a personal loan taken to buy a house, the principal repayment of an education loan will not qualify for tax benefits. But you can claim deduction for the entire interest paid for the first eight years or until the interest is fully paid, whichever comes earlier.

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