On 5th July 2019 Finance minister Nirmala Sitharaman in her maiden budget speech of Union Budget 2019 has proposed to extend income-tax benefit of Rs.1.5 Lakh towards interest paid on loans for buying Electric Vehicle.

A new section 80EEB is been proposed to be inserted in Income Tax Act via Finance Bill 2019 to extend this benefit to the applicable assessees.

Extract of Section 80EEB as per Finance Bill 2019

80EEB. (1) In computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of purchase of an electric vehicle.

(2) The deduction under sub-section (1) shall not exceed one lakh and fifty thousand rupees and shall be allowed in computing the total income of the individual for the assessment year beginning on the 1st day of April, 2020 and subsequent assessment years.

(3) The deduction under sub-section (1) shall be subject to the condition that the loan has been sanctioned by the financial institution during the period beginning on the 1st day of April, 2019 and ending on the 31st day of March, 2023.

(4) Where a deduction under this section is allowed for any interest referred to in sub-section (1), deduction shall not be allowed in respect of such interest under any other provision of this Act for the same or any other assessment year.

(5) For the purposes of this section,––

(a) “electric vehicle” means a vehicle which is powered exclusively by an electric motor whose traction energy is supplied exclusively by traction battery installed in the vehicle and has such electric regenerative braking system, which during braking provides for the conversion of vehicle kinetic energy into electrical energy;

(b) “financial institution” means a banking company to which the Banking Regulation Act, 1949 applies, or any bank or banking institution referred to in section 51 of that Act and includes any deposit taking non-banking financial company or a systemically important non-deposit taking non-banking financial company as defined in clauses (e) and (g) of Explanation 4 to section 43B.’

Important Points to be noted are:-

  • The meaning of Electric vehicle is not restricted to Car alone but includes all kind electric vehicles
  • The benefit under section 80EEB is available only to an Individual. However businessmen can claim interest paid towards any business assets purchased as deduction against its income.
  • Use of the vehicle by the taxpayers is not a condition for deduction u/s 80EEB.
  • And most important, the deduction is available only if the vehicle is purchased by availing loan. Further, only if the loan is taken from “financial institution” between 1stday of April, 2019 and ending on the 31st day of March, 2023

The memorandum explaining the logic behind section 80EEB as incorporated states that:- 

With a view to improve environment and to reduce vehicular pollution, it is proposed to insert a new section 80EEB in the Act so as to provide for a deduction in respect of interest on loan taken for purchase of an electric vehicle from any financial institution up to one lakh fifty thousand rupees subject to the certain conditions

However, there tends to be conflict between the mission at hand and route through which the benefit is been offered.

To achieve the mission of Go green and take care of environment, lawmaker should ideally offer a tax benefit on procurement of an Electric Vehicle by any Individual, without getting into a nitty gritty of mode of finance opted for it.

By allowing deduction under section 80EEB only on interest paid on loans for buying Electric vehicle, the benefit of procuring an Electric Vehicle is been restricted only to a person opting for a loan from a financial institution.  A person buying the same out of his own funds is been deprived from getting this benefit, which would discourage a large chunk of High Net-worth Individuals (HNIs) from buying it.

Based on certain analysis, on a loan of Rs.10 Lakhs for 5 years tenure, the buyer will end up paying Rs.1.2 Lakh as interest per annum. This will lead to a tax savings of Rs.36000 per year for an individual in 30% Tax bracket. That is, for an expenditure of Rs.120000 one can save up to Rs.36000, net effect of which is an increase in expenditure by Rs.84000, the benefit would be still less in cases where a person is in a lower tax bracket.

However the question worth asking is whether the mission Go-Green is a sole motive behind this scheme or is the tax sop being offered is to boost business of financial institutions.

Disclaimer: the above views are based to authors understanding and interpretation of law, expert advice and user discretion is recommended prior to application of the content. Author is not liable for any penalty, fee, interest etc occurred due to application of opinions. The views, thoughts and opinions expressed in the text belong solely to the author, and not necessarily to the author’s organization, committee or other group or individual.

Author can be reached at caidrismk@gmail.com

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