Income Tax Return Filing: How Certain Loan Products Can Help You Save Income Tax

Updated on: 19 Jan 2024 // 5 min read // Home Loans
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Do you know a loan can also play a vital role in tax savings? Well, a large majority of tax-payers are often unaware of the tax benefits they can reap as a result of taking certain loans.

While the government encourages individuals to pay taxes, it also instils the importance of investing in various financial schemes.

Investments & Tax Saving

In India, individuals earning Rs. 2.5 Lakh or more per annum are required to pay income tax ranging from 5% to 30% of their income, besides a compulsory cess and surcharge. The exception is, the tax exemption announced for those earning up to Rs 5 Lakh in the FY 19-20. However there is no change in the Income Tax Slab Rates

In accordance to the same, citizens can conveniently avail tax benefits up to Rs 1.5 Lakh through investments instruments such Equity-Linked Savings Scheme (ELSS), Public Provident Fund (PPF) and Unit Linked Insurance Plans (ULIP), etc under section 80D of the Income Tax Act of 1961. Likewise an additional tax deduction of Rs 50,000 can be enjoyed for contribution to National Pension Scheme under Section 80CCD in India

Loan Products & Tax Saving

Now let’s take a quick look at some of the various loan products which can help you enjoy some incredible savings on your annual Income Tax Returns.

Home Loan

The government encourages the purchase of one’s own home and does everything in its power to make the process of taking a Home Loan and repaying it, as easy and convenient as possible.

When you Opt for a Home Loan, you are entitled to enjoy tax benefits on both, the principal repayment as well as the interest repayment. Under section 80C of the Income Tax Act, you are entitled to claim a tax deduction of up to Rs. 1.5 Lakh on the principal repaid in any given financial year. Here, you can also claim the deduction on the stamp duty and registration charges paid at the time of acquiring the property, albeit the deduction is subject to the cap of Rs. 1.5 Lakh, including the principal repayment. 

Similarly, you are also entitled to claim a deduction of up to Rs. 2 Lakh on the interest paid towards the Home Loan of a self-occupied property, under section 24(b). Moreover, if the property is let out, you can claim the deduction on interest repaid in a financial year, without any upper limit, whatsoever.

Also, as per Union Budget 2019, paid-up interest for affordable units would fetch an additional Rs 1.5 Lakh tax exemption.

Just in case you are purchasing an under-construction property, you can claim the deduction on the interest repayment once the construction is complete, in five equal instalments, provided the total deduction does not exceed Rs. 2 Lakh.

Home Improvement Loan

If you opt for a Personal Loan, the funds procured from which are directed towards the renovation or improvement of your residential property, you are entitled to claim a tax deduction of up to Rs. 30,000 on the interest paid on such a loan, in a given financial year.

Such a deduction can be easily claimed on any of the wide variety of loans available for this purpose including – Personal Loans, Home Improvement Loans, Home Loan Top-Up, and Renovation Loans. In this case, however, it is strongly recommended that you preserve all the bills as proof of your home renovation project, as you may be asked to present the same when you claim the benefit.

Education Loan

In the present day times, it has become largely common for students to opt for student loans, also known as education loans, in order to fund their higher studies. As is the case with the other loans listed here, an education loan can also help your reap tax benefits, under section 80E of the Income Tax Act, wherein you can claim deduction on the entire amount of interest paid towards this loan in a given financial year.

Here, it is important to understand that this benefit is only available if the loan is procured by an individual. The benefit is not offered in case the loan is acquired by Hindu Undivided Families. Then again, the tax benefit can only be claimed when the loan is taken for self, child or spouse. The deduction can be claimed for up to 8 years until the repayment of the loan amount.

Business Loan

If you opt for a Personal Loan, the funds procured from which are directed towards managing the operational expenses of your business, you can claim deduction on the interest paid towards this loan, by showing it as an expense to the business. In this case, it is essential that the loan is taken under the name of the business. This will help you deduct the amount going towards interest from your business profits, thereby ensuring that you get the much-desired exemption from taxes.

Business Acquisition Loan

If you take a Personal Loan or a Business Loan, the funds from which are directed towards the acquisition of assets such as shares, debentures, land or machinery, you can write it off as the cost of acquisition. This will help you deduct the relevant amount from your business profits, thereby revelling in the subsequent tax benefits.

Other Loan Products

If you take a Car Loan, for purchasing a vehicle that is used to carry out your business or profession, you can write off the interest paid towards the loan as a business expense. It will then be reduced from your profits, thereby lowering your overall tax liability. Of course, the vehicle needs to be registered in the name of the business to reap the tax benefits. The same holds true when you purchase other items of need for the business with the help of a loan. In such cases, you must keep all the relevant documents and bills ready, just in case you are required to present them while filing your tax returns!

We hope that you now have a fair idea regarding tax savings through certain loans, and are ready to make the most of these provisions!

Also Read: Income Tax Documents Required for Home Loans

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