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How to claim tax benefits on Car Loans?

09 Sep 2021 by Team FinFIRST
Tax benefits on Car Loan

Although car loan tax benefits exist, they’re not available for everyone. Read on to know who can claim benefits on their car loan.


When you opt for an education loan or a home loan, you avail of certain tax benefits and get tax exemptions from Income Tax. However, it does not apply to car loans. Unlike education and property, a car is a luxury product, and that is why not everyone is eligible to get tax benefits on car loans. But then, how is it decided who gets the car loan tax benefits and who doesn’t?

Who can get the tax benefits on car loans?


According to the rule, salaried professionals cannot get tax benefits on car loans. Only business owners and self-employed individuals can get those benefits and exemptions.” Cars for personal use are luxury products, whereas the cars used for businesses and commercial purposes can be considered a business expenditure.

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How to claim tax benefits on car loans?


If you are a self-employed individual or a business owner, here is how you can claim your car loan income tax benefits:

1. Show you use the car for legitimate business purpose


To claim car loan tax exemptions from Income Tax, you need to show that you are using the car for legitimate business purposes and not as a personal vehicle.

2. You can claim tax benefits only on interest


You can only claim car loan tax benefits on the interest and not the principal amount.

For instance, assume you are a business owner, and you buy a car for commercial purposes. For this, you take a loan of ₹10 lakhs at 12% interest for one year. If your taxable income from the business is ₹30 lakhs for the year, then ₹8.8 lakhs (which is 12% of ₹10 lakhs) can be deducted from your annual income while paying tax. Hence, for that year, you will only have to pay tax for ₹21.2 lakhs.

So, provided the car is purchased for business purposes, the car loan interest you pay for the car loan can be listed as your business expenditure while filing your income tax returns.

You can request the bank to issue an interest certificate. This certificate will show the amount you have paid as the interest on your car loan and will help claim tax benefits on the loan.

Another way to claim tax benefits on your car


Besides the tax benefits you get on your annual income for paying the interest on your car loan, you can also claim tax benefits upon showing your car as a depreciating asset. A depreciating asset is a commodity whose price is seeing a gradual reduction as time passes. If you show your car as a depreciating asset, you can claim tax benefits on it by showing the depreciation as an expense. The depreciation expense can be exempted from tax even if you have purchased the car without a loan.

According to the rule, salaried professionals cannot get tax benefits on car loans. Only business owners and self-employed individuals can get those benefits and exemptions.” Cars for personal use are luxury products, whereas the cars used for businesses and commercial purposes can be considered a business expenditure.

 

Points to remember when claiming tax benefits on a car loan:


1. Your tax claim can be rejected if the Income Tax officer concludes that you have not used the car for commercial purposes.

2. The car needs to be bought and registered under the name of the business or the business owner to be eligible for the car loan tax benefits.

Now that you know how car loan tax benefits work and how they are claimed, ensure you follow the correct procedure and guidelines to avail of tax exemptions. Also, ensure you get your interest certificate from your bank as it helps correctly file your income tax returns.

If you are planning to apply for a car loan and want to check your EMI affordability, you can use the car loan EMI calculator on the IDFC FIRST Bank website. The calculator gives you a comprehensive idea of your EMI and rate of interest. You can also avail of car loans for new and pre-owned cars from IDFC FIRST Bank at affordable rates.

 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.