How Certain Loans Can Help You Accomplish Goals and Save Tax?

November 22, 2021 Mutual Fund

Debt has become an integral part of our life. You cannot avoid taking certain loans if you want to achieve certain goals at an early age. For example, a home loan and an education loan are essential loans. These loans are generally considered as ‘good loans’ because they actually help you in managing your financial requirements to achieve important goals like buying a home or funding child’s education. On the contrary, availing of personal loans and excessive use of credit cards and credit apps are considered ‘bad loans’ as they can create a debt burden on you that you might struggle to pay later.

How do you know whether the loan you are taking is a good loan or a bad loan? Good loans help you in shaping your financial future and they offer you more value to the cost of the loan. For example, an education loan ensures a secured future, and the mortgage loan is beneficial as the value of the property increases over time. Whereas, bad loans can harm your financial future and do not add any value to the loan taken. For example, a personal loan taken for a vacation will increase your monthly EMI burden. So, we can say that the purchase you make with the loan decides whether the loan is good or bad for you. However, the definition of a good loan or bad loan may vary from person to person. For example, if you are in a transport business or if you need a car for commuting to work daily, then in that case a car loan can be a good loan for you. But, if you buy an out-of-budget luxury car whose value depreciates over time and the EMIs become a burden on you, the same car loan can turn out to be a bad loan for you. That said, have you ever imagined that good loans can help you in tax saving as well?

Here are some of the types of good loans that can help you accomplish your financial goals and save income tax too:

1. Home Loan:

All of us wish to build our dream house and hence owning a home is one of the important goals we aspire to achieve in life. As it is one of the salient and expensive assets for an individual, buying a home needs huge financial support. A home loan is a common type of loan that individuals can avail from a bank/financial institution to fulfil the goal of having their own house. A home loan is a costly affair in any case; many people are emotionally sensitive about owning a debt-free home. To this end, many people try to repay their loans as soon as possible and reduce their financial burden. However, it is not easy to pay off your home loan when the loan amount is very high. Thus, it is always good to plan in advance and save extra money for home loan repayment.

To boost the real estate sector, the government of India periodically launches various schemes that encourage citizens to buy a house. A home loan can save a significant amount of tax outgo as it comes with multiple tax benefits. You can own your dream house as well as can enjoy the tax benefits on the interest amount and principal repayment. Here are some of the tax benefits on a home loan:

• The interest paid in a financial year is eligible for deduction of up to Rs 2 Lakhs under Section 24 of the Income Tax Act, 1961. The maximum deduction of Rs 2 Lakhs is applicable only for the interest paid on a self-occupied house property. And, there is no upper limit on the let out property. You can claim the deduction from the year the construction of the house is completed.

• The principal amount paid is eligible for a deduction of up to Rs 1.5 Lakhs under Section 80(C). However, you cannot sell the property within 5 years from the date of possession. Otherwise, it will be considered as an income in the year of sale.

• Under section 80EE, you can claim an additional deduction of up to Rs 50,000 on interest payable. However, you need to meet the eligibility criteria mentioned below to get this benefit:

  – The amount of the loan should not exceed Rs 35 Lakhs.

  – The value of the property should not exceed Rs 50 Lakhs.

  – The loan is sanctioned between 1st April 2016 to 31st March 2017.

  – You are a first-time house owner.

• Under section 80EEA, you can claim up to Rs 1,50,000, if you meet the following criteria:

  – The stamp value of the property is not more than Rs 45 Lakhs.

  – The loan is sanctioned between 1st April 2019 to 31st March 2020.

  – You are a first-time house owner.

  – You are not eligible to claim deduction under Section 80EE.

2. Education Loan:

Education is of prime importance to any individual, it is an Investment towards one’s career development and a necessity to lead a successful life. However, with inflation, education has also become expensive in India as well as overseas. Quality education in India can cost anywhere from Rs 5 Lakhs to 30 Lakhs, whereas studying abroad can cost a minimum of Rs 25 Lakhs. It can be difficult for parents to decide whether to utilise their savings or avail an education loan for their children. For a minority of people, it could be an easy choice to shift money from some of their investments. But, most of us have to break our retirement funds, liquidate assets like real estate or gold, borrow from friends and family, and whatnot. However, if you want to continue living a proud life and do not want to compromise on your lifestyle, then there is no better option than availing of an Education Loan.

An education loan covers all the study-related expenses incurred during the course duration. For example, it generally includes admission fee, tuition fee, hostel fee, library fee, cost of books, a laptop, and travel tickets (if you are studying abroad), etc.

Apart from the benefits of an education loan, it also comes with certain tax benefits:

• Only the interest component of the education loan is eligible for deduction from the income under Section 80E of the Income Tax Act, 1961. So, the principal component is not eligible for any tax benefit.

• You can claim this deduction if you have taken an education loan for yourself, your spouse, children, or for someone to whom you are a legal guardian.

• You can take this tax benefit from the year you start repaying the loan. However, you can take the tax benefit under Section 80E for a maximum of 8 years or until you repay the interest, whichever is earlier.

• There is no limit on the maximum amount you can claim.

3. Car Loan:

A car loan is a sum of money we borrow from the lender to purchase a car. Owning a car was once considered a luxury, but it has now become a necessity for many people. The list of benefits of owning a car only grows when we consider the current pandemic. With offices and public places slowly opening their doors, more and more people are considering buying a car to safeguard themselves from COVID-19.

Although we all would like to drive a car, some of us cannot afford to buy it with full down payment. In fact, many people prefer to buy a car on loan since it is available at an affordable rate of interest.

Many experts believe that it is an essential loan and hence should be considered as a good loan. However, others say that it is an asset that depreciates over time and does not add any value to the loan. Hence, it should be considered as a bad loan. Although a car loan is a grey area when deciding whether it is a good loan or a bad loan, it does offer a tax benefit

• If you are a business owner or a self-employed professional and use the car/vehicle for business purposes then you can claim tax deductions on the interest component of the car loan under Section 43(B) of the Income Tax Act, 1961. But, if you are a salaried person, you cannot claim any deduction for it.

• The car/vehicle owned by a business or business owner or self-employed professional and used for business purposes is eligible to claim depreciation (for the whole year) of up to 15% of the price of the vehicle and other expenses such as fuel and maintenance under Section 32 of the Income Tax Act. However, if you buy a vehicle on or after 1st October, you can claim depreciation only for the half year, i.e. up to 7.5% depreciation on it in the first year.

• If you have taken an electric bike loan or electric car loan for personal or business purposes, you can claim tax deductions on the interest component of the electric vehicle loan for up to Rs 1.5 Lakhs under Section 80EEB.

4. Personal Loan:

Personal loans can be very helpful in an emergency or during a financial crunch because these can be availed of with minimum documentation and do not require any collateral. They offer fast cash solution in less time and have shorter tenure. Many banks are now offering instant personal loans available online within a few minutes to specific customers.

Although a personal loan can be used for any purpose, most people tend to avail it for luxuries that could be otherwise postponed. However, almost all finance experts recommend availing of a personal loan only in case of an emergency. Repayment of personal loan EMIs can put a dent in your budget and other financial goals because of its high rate of interest and charges. Therefore, most financial experts consider personal loan as bad loan.

Since a personal loan is treated as a luxury loan, there are no direct tax benefits to it. However, you can take advantage of a tax deduction on personal loans availed for specific purposes:

• To Buy a House or Renovate it:

  You can avail of a personal loan to buy a new house or renovate a house and claim for tax deduction under Section 24 of the Income Tax Act. The maximum deduction of Rs 2 Lakhs is applicable only for the interest paid on self-occupied house property. And, there is no upper limit on the let out property. You can claim the deduction from the year the construction of the house is completed. However, before claiming for the tax benefit, make sure you have all the necessary proofs to show how the loan amount is utilised.

• To Start or Expand the Business:

  You can take a secured personal loan or business loan that is backed up by property or security to start a new business or expand the existing one. In such loans, you can claim the interest component for tax deduction under Section 43B of the Income Tax Act.

• To Purchase an Asset:

  If the personal loan is used for the purchase of an asset, such as gold, shares, property (apart from the first house), etc., the cost of acquisition increases, which lowers the capital gains and ultimately reduces the tax liability.

To Conclude:

If you follow the financial discipline and repay the loans timely, all types of loans can be good loans. Whereas, delaying the EMIs or defaulting the loan can turn any loan into a bad loan. It is advisable to check the need of the purchase through a loan, your eligibility, the total interest outgo, etc. before applying for any loan. If you follow the financial discipline, these loans can help you accomplish your goals and save a substantial amount on tax by smartly utilising them for various tax benefits they offer.

This article first appeared on PersonalFN here