Loans are generally perceived as a liability ensuing outflow of cash. Also, with the rising living standards in India and easy availability of loans, borrowings have become an integral part of average Indian household. However, just as every cloud has a silver lining, there are a few loans which can at least help in reducing our tax outflows.
Loan for residential house property: Investment in a residential house out of borrowed funds could lead to tax savings. In case of a self-occupied house acquired/constructed through a loan, the individual can claim a deduction of the interest payable on the loan, up to a maximum of Rs 150,000 per annum. As the annual value of such a property would be considered nil, this would result in a loss in the computation of income to the extent of interest amount of Rs 150,000. Where the interest is payable on loan for the pre-acquisition/construction years, the deduction could be claimed in five equal installments only from the year of acquisition/construction of property. The above deduction is available only for one self-occupied house and other conditions like acquisition/construction of the house to be completed within three years from the end of the financial year in which loan was availed must also be met. In case of a rented house acquired/constructed through a loan, one can claim deduction of entire interest payable.
Loan for higher education: Interest paid on loan taken by individual from a financial institution/approved charitable institution for pursuing any higher study course from a recognised school/board/university after senior secondary examination/ equivalent is eligible for a tax deduction under Section 80E of the I-Tax Act. This includes loans taken for spouse, children or any student for whom the individual is a legal guardian. As usually education loans are structured in such a manner that the repayment installments begins once the course is completed/after a job is received, it could lead to tax savings for the individual once he starts generating income. However, one needs to keep in mind that the tax benefit is available only for eight continuous financial years.
Loan for business or profession: The interest paid by an individual maybe eligible for deduction while computing the income from business or profession which is offered to tax. This could reduce the tax liability to a large extent. So next time you think about availing a loan, ensure to factor the above tax benefits so that you can save a portion of your tax.
* The author is executive director (tax), KPMG