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Claim Tax Exemptions with These 3 Loan Options_WC

4 min 22 Feb 2023
Claiming Tax Exemptions with 3 Loan Options
Highlights:
  • First Loan Type - Home Loans
  • Second Loan Type - Credit Linked Subsidy Scheme (CLSS)
  • Third Loan Type - Personal Loans

Interest paid on certain types of loans may be tax deductible, which means the borrower can deduct the amount of interest paid from their taxable income. This can lead to substantial tax savings for the borrower. Here are three loan types that can help you maximise your savings by claiming tax benefits. 

First Loan Type - Home Loans

Certain sections of the Income Tax Act allow for tax exemptions on Home Loans. The deduction of interest paid on housing loans is the most common way to obtain tax exemptions on Home Loans in India. Here is the list of sections under which one can avail tax benefits. 

Section 24

Section 24 of the Income Tax Act of India addresses the tax exemptions of a Home Loan. The interest paid on a Home Loan is deductible under this section. The maximum deduction for the self-occupied property is Rs.2 Lakh and Rs.30,000 for a let-out property. 

Section 80C

The Income Tax Act of India, Section 80C, allows for tax deductions on certain specified investments and expenditures, including the principal repayment component of a Home Loan. The maximum deduction allowed under Section 80C per fiscal year is Rs.1.5 Lakh. This means that taxpayers can claim a deduction under this section for the amount of principal repaid on their Home Loan, up to a maximum of Rs.1.5 Lakhs.  

Section 80C commonly covers the following investments and expenditures:

  • Public Provident Fund Contributions (PPF) 
  • Employees' Provident Fund Contributions (EPF) 
  • Paid premiums for life insurance policies 
  • Children's education tuition fees 
  • Repayment of a Home Loan's principal component 
  • Investing in specific bonds and schemes, such as the National Savings Certificate (NSC) and ELSS (Equity-Linked Savings Scheme). 

Section 80EE

The Income Tax Act of India, Section 80EE, provides an additional tax exemption for first-time homebuyers. This section allows for an additional deduction of up to Rs.50,000 on Home Loan interest paid, in addition to the deduction available under Section 24 of the Act. 

The following conditions must be met in order to be eligible to claim tax benefits under Section 80EE: 

  • A loan must have been obtained from a financial institution, such as a bank or a housing finance company, for the purchase of a residential property. 
  • The loan amount cannot be more than Rs.35 lakhs. 
  • The residential property's value cannot exceed Rs.50 lakhs. 
  • The person claiming the deduction must not own any other residential property at the time the loan is obtained. 

Please keep in mind that Section 80EE can only be used by first-time homebuyers and loans approved by financial institutions between April 1, 2016, and March 31, 2017. 

Section 80EEA

Section 80EEA of the Income Tax Act of India provides a tax deduction for first-time homebuyers in addition to the deduction provided by Section 80EE of the Act. Subject to certain conditions, this act allows for a deduction of up to Rs.1.5 Lakh on Home Loan interest. The following conditions must be met to claim the deduction under Section 80EEA: 

  • A loan from a financial institution, such as a bank or a housing finance company, must have been obtained for the purchase of a residential property. 
  • The loan amount cannot be more than Rs.45 Lakh. 
  • The residential property's value cannot exceed Rs.50 Lakh. 
  • The person claiming the deduction must not own any other residential property at the time the loan is obtained. 

Second Loan Type - Credit Linked Subsidy Scheme (CLSS)

CLSS (Credit Linked Subsidy Scheme) is a Government of India initiative to provide affordable housing for economically weaker sections (EWS), lower-income groups (LIG) and middle-income groups (MIG). The scheme provides interest subsidies on Home Loans used to build or buy a new house or flat. 

The CLSS allows eligible beneficiaries to receive a subsidy on the interest rate charged by banks on Home Loans. The interest rate subsidies range from 3% to 6.5%, depending on the beneficiary's category and loan amount. The subsidy is credited directly to the beneficiary's loan account, lowering the effective interest rate on the loan.

Third Loan Type - Personal Loans

A personal loan is an unsecured loan taken out by an individual for a variety of personal reasons, such as debt consolidation, home renovation, medical expenses, travel or wedding expenses. Personal loans, unlike secured loans, do not require collateral, and the loan amount is determined by the borrower’s creditworthiness and income. 

Also Read: Hybrid Flexi Loan vs Personal Loan: Which one is Better? 

Deduction on Personal Loans as per Usage 

Personal loans are not tax deductible under the Income Tax Act of 1961. Tax breaks are only available for certain purposes and investments, such as Home Loans, education loans, and certain investments made under Section 80C of the Act. 

There are, however, some exceptions to this rule. For example, if the personal loan is used for business or professional purposes, the interest paid on the loan can be considered a business expense and will be eligible for a tax deduction under the Act. 

Education Loan

An education loan is a type of loan that is designed specifically to finance a student's education, including tuition, living expenses, and other education-related costs. Banks, non-banking financial companies (NBFCs), and other financial institutions provide education loans. The amount of the loan and the interest rate offered are determined by the borrower's credit score, income, and other factors. 

Also Read: Is Opting for a Top-up Home Loan Better than an Education Loan? 

Deduction on Education Loan – Section 80E

Section 80E of the Income Tax Act allows for a tax deduction for interest paid on an Education Loan. The deduction is available for up to eight fiscal years or until the interest is paid in full, whichever comes first. The amount of interest paid on the education loan is fully deductible and there is no cap on the amount that can be claimed as a deduction. To claim the deduction, an individual must provide loan details as well as proof of interest payment to the tax authorities when filing their income tax returns. 

Final Words

By developing an understanding of how you can claim deductions on these loans, you can save a lot of money each year. We hope you will use the information provided in this article to your best advantage.  

DISCLAIMER: 

While care is taken to update the information, products, and services included in or available on our website and related platforms/websites, there may be inadvertent errors or delays in updating the information. The material contained in this website and on associated web pages, is for reference and general information purposes, and the details mentioned in the respective product/service document shall prevail in case of any inconsistency. Users should seek professional advice before acting on the basis of the information contained herein. Please take an informed decision with respect to any product or service after going through the relevant product/service document and applicable terms and conditions. Neither Bajaj Housing Finance Limited nor any of its agents/associates/affiliates shall be liable for any act or omission of the Users relying on the information contained on this website and on associated web pages. In case any inconsistencies are observed, please click on contact information. 

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