Income Tax Rebate on Car Loan

A new car purchase is a significant milestone for middle-class people. A car makes things easier, whether it's a daily commute, frequent family road trips, or weekend get-togethers with friends in the city. Additionally, purchasing a new car is now more reasonable due to the availability of car loans. The good thing is that you can now take advantage of tax savings on auto loans. Your car loan has great tax advantages that can save you a lot of money, just like the majority of loan products, including home or education loans. However, there are restrictions on these advantages. In this article, we will explain the concept of income tax rebate on car loans in detail.

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Table of Contents

• Income Tax Rebate on Car Loan

• Eligibility to Claim Income Tax Rebate on Car Loan

• Steps to Claim Income Tax Rebate on Car Loan

• Income Tax Rebate on Car Loan for Business & Personal Use

• How to Claim Income Tax Rebate on Car Loan

• Income Tax Rebate on Purchase of Electric Vehicles

• Conclusion

• Frequently Asked Questions

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Income Tax Rebate on Car Loan

In India, cars are regarded as luxury goods and are now subject to the highest Goods and Services Tax (GST) rate of 28%. Therefore, if you are purchasing a car for personal use, you are not eligible for any deductions on your loan. On the other hand, you can deduct interest paid in a year from your taxable income if you are purchasing a car for business purposes. Only the interest portion of the loan is eligible for the tax deduction; the principal amount is not.

Eligibility to Claim Income Tax Rebate on Car Loan

Since cars are regarded as luxury goods, buying one for personal use does not qualify for any tax deductions on the loan. salaried individuals cannot claim interest payments as an expense, so this rebate is not available to them. However, a car loan for business use is eligible to claim a rebate for the interest payment as a business expense. This is permissible if you are a self-employed person or business owner. In this case, the interest on your loan is subtracted from your taxable income.

Steps to Claim Income Tax Rebate on Car Loan

Step 1: You must demonstrate that you are using the vehicle for legitimate business needs. Since salaried employees are not eligible for a car loan tax benefit, you must demonstrate that you are using the vehicle for business purposes rather than for personal use in order to qualify for tax savings.

Step 2: Only the interest can be considered an expense. Only the interest paid on the loan, not the principal, may be claimed as an expense for the purposes of the auto loan tax exemption. For example, a business owner wishes to buy a car for work-related purposes. They take out a one-year, 12% car loan for Rs. 15 lakhs. Here, the principal is Rs. 1,18,273 and the EMI is Rs. 1,33,273, of which the interest is Rs. 15,000 for the first month. In this case, the only interest that a person can claim as a business expense in order to qualify for auto loan income tax benefits is Rs. 15,000.

Step 3: The vehicle might be shown as a depreciating asset. Declaring your car as a depreciating asset and using this depreciation as an expense is an additional method of claiming a car loan tax benefit. It's simple to claim your car's 15% annual depreciation. Your taxable profits and, consequently, your tax obligation will decrease as a result. Furthermore, whether or not you purchase a car with a loan, depreciation expenses are tax-exempt.

Income Tax Rebate on Car Loan for Business & Personal Use

There may be instances in which a person purchases a car for both personal and professional use. You can nevertheless guarantee tax rebates in this situation even though you are unable to claim tax benefits on a car loan for salaried employees' personal requirements. Here, you can split the interest and depreciation according to how much of the car is utilized for business and how much for pleasure. Therefore, you can only claim 60% of the costs (interest and depreciation) as business expenses if you use the car 60% for work and 40% for pleasure. In this manner, your tax liability is reduced while still saving money.

How to Claim Income Tax Rebate on Car Loan

The Income Tax Returns (ITR) must be filed in order to claim tax benefits on a vehicle loan. Expenses for the firm must include the interest paid on the loan. To determine the entire amount of interest paid, you can ask the bank for the interest certificate. The following are some crucial details to be aware of before claiming tax rebate on a loan:

• Car ownership: The business owner or the company itself should be listed as the owner of the vehicle.

  
  

• Business use: If the IT officer feels that the car is not being used largely for business purposes, they may refuse tax benefits.

• Documentation: Maintain comprehensive documents to back up your assertions, such as depreciation estimates, fuel invoices, maintenance logs, and evidence of commercial use.

Income Tax Rebate on Purchase of Electric Vehicles

EVs are now a good choice for anyone searching for a practical, reasonably priced, and environmentally responsible vehicle. Besides being efficient and environmentally friendly, buying an electric car can also result in significant tax savings on auto loans for salaried workers. The Indian government proposed some incentives under a new Section 80EEB of the Income Tax Act to promote the country's adoption of EVs. Borrowers are eligible for a rebate of up to Rs. 1,50,000 under this clause on the interest paid on loans taken out for the purchase of electric vehicles. Here are the key aspects you must know:

• Only people are eligible for the tax benefit on auto loans for EV purchases. Therefore, you are not eligible for tax savings if you are a company, partnership firm, HUF, or any other kind of taxpayer.

  
  

• This rebate is only available once. The car loan rebate for salaried personnel are therefore available to those wishing to buy their first EV for both personal and business use.

  
  

• Notably, this tax deduction is only available for loans approved for the purchase of EVs between April 1, 2019, and March 31, 2023.

Conclusion

Income tax rebate on car loans is a complex concept as it is not available to every person buying a vehicle. Notably, only self-employed persons or business owners are eligible for a car loan income tax rebate if the loan is taken out for a vehicle that will be used for business. However, depending on the lender you choose, you may still be eligible for additional car loan perks even if you are a salaried employee.

FAQ

Q1. Is a car loan eligible for tax rebate in India?

If you are purchasing a car for personal use, you are not entitled to any deductions on your loan. On the other hand, you can deduct interest paid in a year from your taxable income if you are purchasing a car for business purposes.

Q2. How to claim a car loan tax rebate?

As long as you are genuinely using the vehicle for valid business purposes, it is simple to claim car loan tax rebates. Include the loan interest paid throughout a year in the business costs column when completing tax returns in order to claim the benefit.

Q3. Are there ways to save taxes on car purchases?

Declaring your car as a depreciating asset and recording the depreciation as an expense is another method to reduce your taxes. Your car might lose up to 15% of its value in a year. Whether or whether you want to take out a car loan, this depreciation can be subtracted.

Q4. Can I take the Section 80EEB rebate if I opt for the new tax regime?

No. Only under the old tax regime is it possible to claim interest paid on a loan taken out for the purchase of an electric car under Sec 80EEB.

Q5. Who is eligible to claim a deduction under Section 80EEB?

Section 80EEB only allows individuals to seek deductions. Therefore, you are not eligible to receive any benefits under this provision if you are a HUF, AOP, partnership firm, company, or any other type of taxpayer.