Just like qualifying investments and insurance products, certain loan products too can bring down your overall tax liability.
When it comes to tax saving, people usually go for investment instruments like Public Provident Fund (PPF), Equity-Linked Savings Scheme (ELSS) and Unit Linked Insurance Plans (ULIP), among others, which qualify for tax deductions u/s 80C. Many people also buy health insurance policies and claim further tax deductions u/s 80D. As such, buying insurance plans and investing in particular instruments to save income tax is a well-known strategy.
However, do you know that you can save further on your tax outgo through certain loan products too? Read on as we discuss how you can go about saving income tax through these loan products.
If you’ve taken a home loan, you can avail tax benefits both on interest payment as well as principal repayment. U/s 80C of the I-T Act, you can claim a tax deduction of up to Rs 1.5 lakh for the principal repaid during the financial year. You may also include the amount paid for stamp duty and registration charges to claim deductions u/s 80C, subject to prescribed ceiling limit.
And you can further claim a deduction of up to Rs 2 lakh for the interest paid on a home loan during the financial year u/s 24. The deduction benefit is also available on the interest incurred during the pre-construction period which can be claimed in five instalments after completion of the project, subject to a prescribed overall deduction limit of Rs 2 lakh.
Home improvement or renovation loan
If you have taken a home renovation loan for a self-occupied property, you are allowed a tax deduction of up to Rs 30,000 against the interest paid on such a loan in a financial year. You can get this benefit on home improvement loans, renovation loans, home loan top-ups, etc. However, it’s important to keep all the bills and proofs handy to claim this tax benefit. You can reduce the renovation/maintenance cost after indexation from the taxable capital gain to reduce your tax liability.
Many people need to take the help of an education loan to fund their higher studies. However, an education loan can also be used to reduce your tax liability. U/s 80E, the entire interest paid for an education loan during a financial year can be deducted from the taxable income to reduce your tax liability to that extent.
Do note that the tax deduction benefit u/s 80E is only available to individuals and Hindu Undivided Families are not allowed to claim this benefit. It is also important to mention here that the tax benefit is available for an education loan taken for self, children, and spouse. Also, the loan should only be taken from qualified banks, financial institutions or charitable trusts. The tax deduction u/s 80E is available for a period of up to 8 years or until repayment of the entire loan amount, whichever is earlier.
Other loan products
If you are into business or a profession and bought a car on loan, you can claim the interest paid against the car loan as a business expense. It will help you reduce the taxable income; thus, the tax liability will also come down. However, it is important to note here that the car should be registered either in the name of the business or the business-owner to avail this benefit. Similarly, you can also take a personal loan for buying things which you need to run your business (such as computers, laptops, printers, etc.) and claim its interest as a business expense to reduce your tax liability.
As such, keep all the documents and proofs ready, especially the ones linked to loan products that can bring down your tax liability while you file your income tax returns this year. Don’t forget, the last day to file your ITR without having to pay any penalty is July 31. So, make your preparations beforehand to avoid last-minute glitches.
(The writer is CEO, Bankbazaar.com)