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The comprehensive guide to tax benefits on loans
The Income Tax Act, 1961, contains many provisions that offer tax relief to assessees for various investments and expenses. Among these provisions, there are also some tax benefits that you can avail on certain kinds of loans. So, in addition to the financial benefits that you get to enjoy by availing a loan, you can also make use of the tax benefits attached to them.
But which loans are eligible for tax benefits? And what are these benefits, specifically? Let’s find out by taking a closer look at the various tax benefits on loans as mentioned in the Income Tax Act, 1961.
Tax benefits on home loans
When you avail a home loan, you need to repay it in monthly instalments. And each instalment consists of the principal and the interest. The Income Tax Act offers tax benefits on the principal component and the interest component under the following sections.
Section 80C of the Income Tax Act
As per section 80C, the principal component of the EMI is deductible from your total taxable income up to Rs. 1.5 lakhs each year. This deduction also includes the one-time stamp duty and registration charges that you pay when you avail the loan. The only condition to be eligible for this deduction is that you must not sell the house property within 5 years of possessing it.
Section 24 of the Income Tax Act
The interest portion of the EMI also offers tax relief as per section 24. The maximum amount of deduction under section 24 depends on the nature of the property, as explained below.
- In case of a self-occupied property, the maximum amount of deduction on interest paid is Rs. 2 lakhs per year.
- In case of a let-out property, there is no upper limit. You can claim the entire interest paid by you as a deduction from your total income.
Section 80EE of the Income Tax Act
Section 80EE offers extra relief on the interest portion, in addition to the tax benefits available under section 24. The maximum amount of deduction available under section 80EE is Rs. 50,000. To be eligible for this tax relief, you need to meet the following conditions.
- You must be a first-time homeowner.
- The amount of home loan availed should not exceed Rs. 35 lakhs.
- The value of the property should not exceed Rs. 50 lakhs.
Section 80EEA of the Income Tax Act
Section 80EEA also offers extra relief on the interest portion of your housing loan, up to Rs. 1.5 lakhs. This is over and above the deduction available under section 24. So, all in all, between section 24 and section 80 EEA, you can claim deductions up to Rs. 3.5 lakhs for the interest component in your home loan EMIs.
The following conditions need to be met if you wish to avail the tax benefits on loans under section 80EEA.
- You must be a first-time homeowner.
- The home loan should have been availed from a financial institution or a housing finance company.
- The stamp duty value of the property should not exceed Rs. 45 lakhs.
- And, more importantly, you should not claim the benefits under section 80EE.
Tax benefits on education loans
Education is a major life goal for all Indians. And whether you already have children, or you’re planning to have kids in the future, you no doubt have some big dreams about the kind of educational opportunities you want them to enjoy.
Education loans can help you make these dreams come true. And as an added bonus, they also come with some tax benefits as explained below.
Section 80E of the Income Tax Act
According to section 80E, the interest paid for education loans can be claimed as a deduction from your total taxable income. Here are the key details about the deduction under section 80E.
- Only the interest portion is eligible for deduction.
- The loan should be taken for funding your own higher education, or the higher education of your spouse or children.
- The loan should be availed from a bank or financial institution.
- The tax relief on education loans can be availed for a maximum of 8 years from the year in which you start repaying the loan.
Tax benefits on personal loans
There are no direct tax benefits on loans taken for personal purposes. However, depending on the purpose for which you use the funds borrowed through a personal loan, you may be eligible for certain tax benefits.
For example, if you use the funds borrowed for home renovation or for making the down payment on your house, you can claim deductions under section 24(b) for the interest portion of the loan.
So, you now know that a home loan or an education loan is so much more than just external financing. There is also quite a bit of tax relief that you can avail. In fact, with the right kind of financial planning, you can time your loans in such a manner that you enjoy the highest possible tax relief and simultaneously meet your life goals like owning your dream house or paying for your children’s quality education.
A quick recap
- The principal component of your home loan is eligible for tax benefits under section 80C of the Income Tax Act.
- As for the interest component of your home loan, you can claim benefits for the same under section 24 as well as section 80EE or section 80EEA of the Income Tax Act.
- The interest paid for education loans is also deductible as per section 80E.
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