Loans! It’s a simple word but many of us are scared of it and don’t want to encounter a situation where they have to take a loan. This is because most of the loans come with a long term financial commitment as they need to be repaid along with a huge interest rate. But this is only one side of the story which we see from outside. The other side is- loans are helpful to bail you out of an emergency and can provide you funds to meet most of your temporary financial requirements. When managed properly they don’t have to be a burden over a period of time. Additionally, there are even loans that come with tax benefits.
These tax benefits have been outlined by the Income Tax Act, 1961 and reduce the burden of tax repayment to quite an extent for borrowers.
Here are the loans that come with tax benefits:
A Home Loan is one of the biggest loans and needs the longest financial commitment from your end. This is because the loan amount for a home loan is mostly high which has to be repaid in a long tenure. However, a home loan comes with a major tax benefit on it.
Home loan tax benefits explained:
- The amount paid towards the principal repayment is for tax deduction under Section 80C of the Income Tax Act.
- The maximum deduction available is ₹ 1.5 Lakhs.
- For a home loan, there is also a deduction for the amount paid as interest. The maximum amount you can claim as interest deduction from your income for a self-occupied property is ₹ 2 lakhs.
- If the home loan is jointly availed, the deduction of ₹ 2 lakhs can be claimed by each of the borrowers.
Tax benefits for second home buyers:
Though first-time homebuyers can avail more tax benefits, as per the Income Tax act, second home buyers are also eligible to claim a tax deduction for their second property purchase. Here is some important thing to know- if one has more than one property, only one house can be counted as self-occupied property. All other houses are deemed to be rented (even if they are not rented out).
For such property (house) the amount interest paid is eligible for a tax deduction up to ₹ 2 lakhs. Whereas the rent received is to be added to the taxable income.
Being expensive affording higher education from your own pocket is not possible for many. This is where an educational loan comes for the rescue and helps aspiring students to scale new academic heights. Better educated people build a better nation, and thus to encourage students to go for higher education, the government provides a tax deduction for education loans. But, in order to claim for it, you must avail education from a scheduled bank.
And as per the section 80E of the IT Act, the interest paid towards the education loan is eligible to be claimed for a tax deduction.
However, there is a limitation of time for which this tax benefit can be availed which is a maximum of eight years or the whole tenure of the loan (whichever is less).
Personal loans are unsecured and can be availed of for a variety of reasons ranging from medical emergencies to clearing your credit card debt. Generally, personal loans come with no tax benefits, But only a few know the fact that utilizing a personal loan for home renovation, education purpose or to pay a lump-sum amount as the down-payment towards your home loan can help you avail tax benefits on it under section 24(b) of the Income Tax Act.
But to avail so, you need to provide the proof that you have used the borrowed amount for that purpose while filling the income tax.
As you can see the aforesaid these three loans not only inject cash-flow when you are in need but also provide tax relief. However, it’s very important to analyse your repayment capacity before you borrow.