Your loans can help you save tax. Find out how
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Some people prefer to save up for months or years on end before making that big ticket purchase or taking that extended vacation. Others may take a loan instead, so they can make that premium purchase right away. If you belong to the latter category, you may have a considerable amount of debt in your portfolio.

As you may have no doubt been told many times before, debt is not the best thing to have, financially speaking. However, there is an upside to debt that is not often discussed. Today, we’ll let you in on this big secret.

Some loans can help you save tax.

Yes, you read that right. As per the Income Tax Act, 1961, some loans come with many tax benefits attached. Let’s take a closer look at how loans can help reduce the burden of taxation.

Home loans

Home loans come with some of the lowest interest rates in the market. This is primarily because they are secured loans, where the house that you wish to buy or build is used as collateral.

If you have availed any kind of loan before, you probably know that the EMIs consist of an interest component and a principal component. A home loan is no different. Each EMI has both interest and principal portions, and the Income Tax Act, 1961 offers tax benefits on both these components.

Tax benefits on the principal component of home loans

As per section 80C of the Income Tax Act, the principal component of your home loan EMIs are eligible for deductions from your total taxable income up to Rs. 1.5 lakhs each year. Here are the details you should know about this benefit.

  • The one-time stamp duty and registration charges that you pay are also eligible for deduction.
  • To be eligible for this benefit, you must not sell the house property within 5 years of possession.

Tax benefits on the interest component of home loans

The interest component of your home loan EMIs also come with their own tax benefits. In fact, there are three sections of the Income Tax Act that are relevant here, as explained below.

  • Section 24 of the Income Tax Act

As per this section, you can claim a deduction on the interest portion of the EMIs repaid during the year. If the loan has been taken for a self-occupied property, the maximum amount of deduction is limited to Rs. 2 lakhs per year. But if the loan has been taken for a property that has been let out, you can claim the entire interest portion as a deduction from your total income.

  • Section 80EE of the Income Tax Act

This section offers benefits on the interest component over and above the benefits u/s 24. Under section 80EE, you can claim a maximum deduction of Rs. 50,000. However, to be eligible for this tax benefit, you must be a first-time homeowner. Also, the amount of loan availed should be Rs. 35 lakhs or lower, and the value of the property purchased or built should be Rs. 50 lakhs or lower.

  • Section 80EEA of the Income Tax Act

Section 80EEA also offers tax benefits over and above what section 24 offers. However, if you claim the tax benefits offered u/s 80EEA, you cannot avail the benefits u/s 80EE.

As per section 80EEA, the interest portion of your housing loan EMIs is deductible up to Rs. 1.5 lakhs per year, provided you are a first-time homeowner and you have taken a loan from a financial institution or a housing finance company. Also, the stamp duty value of the property should not exceed Rs. 45 lakhs.

Education loans

The cost of higher education is on a steep rise. Take the cost of earning a medical degree, for instance. The prices rose from Rs. 15.50 lakhs in 2007, to Rs. 41 lakhs in 2017, and is projected to rise up to Rs. 173 lakhs by 2027![1]

But education is a major life goal, and an essential one at that. Fortunately, education loans can help you meet the rising costs of obtaining your (or your children’s) educational degree. In addition to that, education loans offer tax benefits on the interest component of the EMIs u/s 80E of the Income Tax Act.

Here are the details regarding these tax benefits.

  • The loan should be taken for meeting the costs of your own higher education or the costs of higher education for your spouse or children.
  • You should have availed the loan from a bank or a financial institution.
  • There is no upper limit on the amount of deduction you can claim.
  • You can only claim the deduction on the interest component of the EMIs.
  • The benefits can be availed for a period of 8 years from the time you availed the loan, or till the interest has been repaid, whichever occurs earlier.

Summing up

So, the next time you file your Income Tax Returns, you know what to do if you have availed a home loan or an educational loan, isn’t it? Make sure you claim the deductions available to you, provided you meet the eligibility criteria mentioned above. This can help you reduce your tax liability significantly.


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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.