A loan plays an important role in bridging a gap in your finances during crucial times or when you want to buy your dream home. While the loan approval process is easier, its repayment sometimes becomes an expensive task as many loan borrowers fall into a debt trap.
However, there are several loans which can provide a relief to the borrowers along with tax exemptions too. The important among these are home loans, personal loan, education loan etc. Let’s discuss them in detail and know their benefits:
A home loan is an amount of money borrowed from a bank to purchase a house. It consists of an adjustable or fixed interest rate and payment terms. The best part of taking a home loan is that in this case, both principal, as well as interest paid, is eligible for tax deduction. Under section 24, while taking a home loan, a borrower can claim deductions up to Rs 2 lakh on the interest portion of the EMI paid in one year.
According to a tax expert, “Even if your property is under construction, you can claim pre-construction interest. An individual can do this once the construction is completed in five equal installments, over and above the deduction you are otherwise eligible to claim from your house property income. However, the maximum eligibility remains capped is Rs 2 lakh.”
On the other hand, under section 80 C, a loan borrower can also claim a deduction up to Rs 1.5 lakh on the principal repay back in one year. However, to retain this benefit, the individual cannot sell the property for at least 5 years. Else, the deduction claimed earlier will be added back to income in the year of sale.
Apart from EMI and principal, one can also claim a deduction on stamp duty and registration charges under Section 80C within the overall limit of Rs 1.5 lakh.
Personal and Car Loan
With these two loans one cannot expect to get a tax benefit, but not everyone has the right knowledge about this. Both these loans also offer certain tax benefits. While a car loan if undertook by a self-employed individual and is used for commercial purpose falls under tax deductions.
Similarly, in the case of personal loans, a borrower can claim a tax deduction if it is sought for business purpose.
An education loan is taken for higher studies. So, if an individual has taken a loan from a financial institution or a recognized bank, then they can avail tax benefit. Under Section 80E of the Income Tax Act, any interest paid towards the education loan is eligible for a tax deduction for a maximum of 8 years.
However, always keep in mind that these tax rebates are only an incentive to reduce the loan burden. It’s important that a person always select the right type of loan for any situation based on criteria like requirement, repayment, and interest payable.