For the middle-class, purchasing a new car is nothing less than a milestone. Easier daily commute, frequent road trips with the family, or weekend hangouts with friends in the city, car makes everything convenient. And thanks to the availability of car loans, buying a new car has become more affordable on the pocket.
However, did you know that today you can avail tax savings on a car loan? Yes, that’s right! Like most loan products, such as education or home loans, your car loan is also subject to excellent tax benefits that can help you save significantly. But these benefits come with certain conditions.
What are these conditions? Are there car loan tax benefits for salaried employees? And how can you claim a tax rebate on a car loan? Here’s all you need to know.
Vehicle loan tax exemption
As mentioned above, borrowers applying for home loans or education loans are eligible to claim tax benefits. This is because the interest paid on only certain loans can be claimed as an expense under the Income Tax Act.
For instance, in the case of a home loan, any borrower can claim tax deductions on the interest paid as well as principal repayment.
However, when it comes to a car loan, the interest paid on loan is not considered an expense in some cases. One can only treat it as an expense and avail tax deductions when they purchase the car for business purposes. Hence, not everybody can claim a car loan tax exemption.
Who can avail car loan income tax benefits?
Since a car is considered a luxury product in India, one is not eligible for any tax deductions on the car loan if one purchases a vehicle for personal use. As salaried individuals cannot treat loan interest payments as an expense, no tax benefit on a car loan for salaried employees is available.
On the other hand, if you’re a self-employed individual or business owner, you can secure an affordable car loan for business purposes and claim the interest payment on the loan as a business expense. This way, your loan interest payments will be deducted from your taxable income.
In addition, you can also enjoy car loan tax benefits on the depreciation of your car and save significantly.
How can you avail car loan tax exemption?
1. You have to show the use of the car for authentic business purposes
Since there is no car loan tax benefit for salaried employees, you need to show that you’re using the car for legitimate business needs and not personal use to enjoy tax savings.
2. You can treat only the interest as an expense
To claim a car loan tax exemption, you can only treat the interest paid on loan as an expense, not the principal amount. Let’s understand this with an example.
Suppose a business owner wants to purchase a car for commercial needs. They take a car loan of Rs. 15 lakhs at 12% for a year. Here, the EMI will amount to Rs. 1,33,273, of which the interest will be Rs. 15,000 for the first month, and the principal amount equals Rs. 1,18,273.
Here, an individual can only treat the interest of Rs. 15,000 as a business expense to avail of car loan income tax benefits.
3. You can show the car as a depreciating asset
Another way to claim a car loan tax benefit is to show your car as a depreciating asset and treat this depreciation as an expense. You can easily claim the depreciation on your car at 15% every year. This will reduce your taxable profits and hence your tax liability.
What’s more, depreciation expense is exempted from tax whether you buy a car with a car loan or not.
4. Tax benefits on the car used for both personal and business needs
Now, there might be situations where an individual buys a vehicle for business and personal use. While you cannot claim tax benefits on a car loan for salaried employees for personal needs, you can still ensure tax savings in this case.
Here, you can divide the interest payment and depreciation in the ratio in which the car is used for personal and business purposes. So, if you use the car 60% of the time for business and 40% for personal use, you can claim only 60% of the expenses (interest and depreciation) as a business expense. This way, you’re still saving on your tax liability, albeit lower.
How does vehicle loan tax exemption work?
If you’re a business owner or a self-employed professional, you can claim a car loan tax exemption by treating the interest payment as an expense. Which means you can decrease your taxable income by the amount you have already paid as interest.
In the above example, if the individual’s taxable income from the business is Rs. 35 lakhs in a year, they can deduct Rs. 1.8 lakhs (12% of 15 lakhs) from the annual income. This reduces their taxable profit to Rs. 33,20,000 and also the income tax to be paid.
How to claim tax benefits on a car loan?
If you’re a salaried individual looking for tax savings on your new car loan, you cannot enjoy any tax benefits on a car loan for salaried employees. However, as a business owner, you can enjoy tax savings when filing your income tax return
To get a tax rebate on car loan, you have to list the car loan interest paid as a business expense. For this, you can request your lender to issue an interest certificate indicating the amount paid as interest on the car loan to enjoy tax savings.
Tax benefits on the purchase of electric cars
Today, EVs have become a viable option for people looking for a convenient, affordable, and eco-friendly ride. Electric cars are not just sustainable and efficient, but you’ll be happy to know that you can enjoy excellent tax benefits on car loans for salaried employees when purchasing an electric car.
To encourage EV adoption in the country, the government of India announced certain incentives under a new section 80EEB of the Income Tax Act. Under this section, borrowers are eligible for tax deductions of up to Rs. 1,50,000 on the interest payment of the loan taken for an EV purchase.
- The tax benefit on car loans for EV purchases is only available to individuals. So, if you’re a company, a partnership firm, a HUF, or any other type of taxpayer, you are not eligible for tax savings.
- This is a one-time benefit. So individuals looking to purchase their first EV for personal and commercial purposes can avail car loan tax benefits for salaried employees.
- Note that such tax deduction is only available on loans sanctioned between 1 April 2019 to 31 March 2023 for the purchase of EV.
Key points to remember-
1. To be eligible for tax deductions on your car loan, you must use the car for legitimate business needs and not personal purposes.
2. The car must be registered in the name of the business or the business owner (if it’s a practising professional or proprietary firm) to claim tax deduction.
3. The income tax assessing officer has the discrete power to reject the tax deduction claim if they believe you are not using the car for professional or business purposes.
The bottom line
Now that you know how car loan income tax benefits work, you can save significantly on your car loan interest payments. Make sure to get the interest certificate from the lender to file your IT return.
And when you’re ready to bring home your dream car, turn to Tata Capital for quick access to funds! Get an affordable vehicle loan at the most competitive interest rates and a swift application process.
Visit our website to know more.
FAQs
1. Can I claim a TDS deduction on a car purchase?
No, a TDS deduction for car purchases is not applicable. TDS is applicable only on specific transactions like interest, salary, rent, etc.
2. Does a car loan cover road tax?
Whether the loan covers the 100% on-road tax on the car depends on the lender. While some lenders do offer 100% financing for the car, most lenders only cover 80 to 90% of the car’s on-road price. The on-road price includes the car registration charges, road tax, and insurance charges.
3. Is there any tax exemption on a car loan?
Self-employed individuals or business owners who have purchased a car for business purposes can avail of tax exemption on the car loan. They can claim the interest payment as a business expense and avail of an income tax deduction. They can also enjoy tax exemption on the depreciation of the vehicle.
However, salaried employees cannot claim any tax exemption on their car loans.
4. Which loans are exempted from income tax?
In India, individuals can enjoy income tax exemption on education loans under section 80E of the ITA, home loans under various sections, and personal and car loans taken for business purposes.
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