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Balwant Jain

“ He is poor, his neighbour is poor. How do they manage? They borrow from each other.”

I had read the above line in my college days which I still remember and like most. IT fully explains the importance of borrowing for all of us. Most of us must have borrowed at some point in life whether it is friendly borrowings from friends and relatives or whether it is a home loan from a financial institution. In this article, I shall discuss the tax benefits available in respect of such loans.

Deduction for home loans

Section 24(b) of the Income Tax Act allows you a deduction for interest on any money borrowed to buy, construct, or even for repair or reconstruction of a property. The interest can be claimed for residential as well as commercial property. Even the processing fee or prepayment charges paid are also treated as interest for income tax purpose, therefore, can be claimed. The interest can be claimed for any money borrowed be it from banks or friends and relatives, as long as you are able to prove actual use of the money borrowed is for the specified purposes.

The quantum of deduction for the interest which can be claimed will depend on whether the property has been let out or is used for own residence. For a self-occupied property, the deduction is restricted to Rs. 2 lacs only whereas for a let-out property, you can claim full interest. If you have more than one self- occupied houses, you have to select one house as self-occupied and the other house/s is treated as let-out. In such case, you have to offer notional rent for taxation on such property and can also claim full interest payable in respect of such house treated as let out. So in order to maximise your tax benefits, it is advisable to treat the property on which interest is lower as self-occupied in case of interest payable on any or all of the property is more than Rs. 2 lakhs in such cases.

For an under construction property, you can claim interest only from the year when construction of the property is completed and possession is taken. However, for interest paid during the period prior to the year of taking possession, the aggregate of such interest can be claimed in five equal instalments beginning from the year of completion of construction. This is within the limit of Rs. 2 lacs in case of self-occupied house property. However in case you sell the property before completing five years after taking possession, the claim for remaining year is lost.

Section 80C allows an Individual and an HUF to claim a deduction up to Rs. 1.50 lacs towards principal repayment of a home loan taken for a purchases or construction of a residential house. This deduction is available with other eligible items like Life Insurance Premium, NSCs, EPF, ELSS and stamp duty and registration charges etc.

This deduction can only be claimed for repayment of home loan taken from specified entity like banks, Housing Finance Companies. Etc.

Please note that in case you sell the house, acquired with a home loan, within five years from the end of the year in which possession of the house was taken, all the deductions allowed in earlier years shall be withdrawn and will be treated as income of the year of sale of the property.

Deductions in respect of education loans

The income tax laws allow you to claim the full amount of interest paid during the year on education loan taken for higher education. The law allows you only to claim the interest on education loan and no deduction for repayment of the principal amount is allowable. The deduction is available on the basis of actual payment of interest. Therefore if you pay the interest for earlier years in a single year, you will get the deduction in respect of all the actual interest paid irrespective of the year to which the interest relates.

The deduction for interest can only be claimed for a maximum of eight consecutive years beginning from the year in which you first start paying the interest. In case you have opted for a moratorium during the education period, the eight year period shall start later. However, if your loan tenure exceeds eight years, you cannot claim the deductions beyond the consecutive period of eight years. It is therefore advised that you should plan to repay the education loan within eight years.

The deduction can only be claimed for education loan taken for pursuing any Government recognised course after Senior Secondary Examination or HSC as is popularly known. Even part- time course or a diploma course shall also qualify for the purpose of claiming interest deduction if the institution imparting such course is recognised.

The benefit is available only to an individual only. You can claim the deduction if the loan has been taken for the study of yourself, your spouse, child or any other child for whom you are a guardian. However, this deduction is not available for education loan taken for your siblings.

It is advisable to claim the benefit of interest for such loan in the income tax returns of the person who falls in the higher tax slab. The parents can take the benefit of interest deduction in case the interest is agreed to be paid during the continuance of the education. In case the person for whom the loan is taken falls in higher tax slab, he can pay the interest and claim it in his income tax returns. Therefore it is advisable to take an education loan in joint names of parent and the student so as to have the flexibility for claiming the interest.

For qualifying, the education loan should have been taken either from a financial institution or any approved charitable institution. Interest on loan taken from relatives or friends will not be eligible for this deduction. The first category covers all the banks including cooperative banks, one non-banking institution HDFC Ltd. (Credila) is also approved by the government for this purpose. There is another category of institutions which includes charitable institutions and NGOs, from where education loans can be taken to qualify for tax benefit on interest.

Car Loan

Generally, no tax benefits are available to a salaried person in respect of any car loan. However in case the vehicle for which the loan is taken is used for the purpose of your business or profession, you can claim the interest in respect of such auto loans as well as the depreciation on the motor car to the extent the same is used for your business purpose.

Personal Loan/loan on credit card etc.

The income tax per se does not allow any tax benefit in respect of any personal loan or loan taken on credit card. However in case the personal loan taken has been used for a purpose like paying for margin money for your house or for any business asset and if you are able to establish such usage, the interest so paid can be claimed based on the purpose for which the personal loan, taken has been used. However, in my opinion, the benefit for repayment of such personal loan can not be claimed under Section 80 C as the money borrowed is not for the specific purpose of buying or constructing a house.

I am sure the above discussion will be useful while borrowing the money for specific purposes.

Balwant Jain is CA, CS and CFP. Presently working as Company Secretary with Bombay Oxygen corporation Limited, View are his personal.He can be reached at jainbalwant@gmail.com, @jainbalwant)

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6 responses to “Loans and income tax benefits available”

  1. Deepak kr. says:

    It’s important article…..

  2. Laxmi Negi says:

    thank you Sir, for this useful knowledge.

  3. balwant jain says:

    Yes. You are right the institution should be approved and not the course.

  4. vaibhav says:

    very informative,keep up the good work SIR

  5. R GANESAN says:

    Sir ,thanks very much for the interesting article. With respect to interest on education loan you have mentioned that the loan should be for pursuing any Govt recognised course, after Sr secondary education or HSC. Clause (c) of sub-section (3) of Section 80E defines “higher education ‘ to mean any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or local authority or any other authority authorised by the Central Government or State Government or local authority to do so. It means that the higher education need not be approved by the Govt but it should be after SSC from the school or board or university recognised by the Govt/local authority. If the higher education for which loan is availed has to be recognised by the Govt, no one can get the relief for education abroad, which may not be the intention.

  6. TEETO CHERIAN says:

    Thanks Sir for the Article..It was very much informative & helpful for us to understand the terms of Loan.

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