Tax Deduction for Interest paid on Car Loan
The Interest paid on some types of Loans is allowed to be claimed as an Expense under the Income Tax Act. However, all types of interests are not allowed to be claimed as an expense.
The most common reasons for which people take loans are when they intent to buy a home or a car. It is fairly clear that the interest paid on home loan is allowed as a deduction in all cases.
If a Salaried person takes a Car Loan, then he cannot claim the Interest on Car Loan as an expense. Therefore, there would no treatment of the interest paid on Car Loan by the Salaried Employee.
Treatment of Interest on Car Loan used for Business Purpose
In such cases where the Car is being used for Business purposes, the interest paid on Car Loan is allowed to be treated as an expense which leads to lower taxable profits. This can be explained with the help of an example.
For eg: Mr. X takes a 3 year Car Loan to purchase an Audi. The car loan interest rate is 10% and the loan amount is Rs. 30 Lakhs.
Assuming taxable profits from the current business are Rs.
80 Lakhs. In this case, the treatment would be as follows:-
|
Net Profits before Int. on Car Loan |
80,00,000 | |
|
(Less) |
10% Interest on Car Loan (10% of Rs. 30,00,000) |
3,00,000 |
|
(=) |
Taxable Profits |
77,00,000 |
As the interest on car loan is allowed to be treated as an expense, this reduces the taxable profit which in turn reduces the Income Tax to be paid. Thus, as the interest on car loan is allowed to be treated as an expense, this reduces the income tax liability of the person availing the loan.
Other
Relevant Points
This can be explained with the help of an example. In the above example, Mr. X had taken a Car Loan of Rs. 30,00,000 at 10% p.a. for 3 years.
The EMI in the above mentioned case is Rs. 63,741. Out of this Rs. 25,000 constitutes the interest part and Rs. 38,741 constitutes the Principal part.
Rs.
25,000 would only be allowed to be treated as an expense and not the principal
repayment of Rs. 38,741. There would be no treatment of Rs. 38,741 from the
point of view of Income Tax and it would only be considered as principal amount
repaid.
If a Car is used for business purposes, then Depreciation on Car can be claimed as an expense. This depreciation is allowed to be claimed irrespective of whether the car is purchased through loan or without a loan.
The
depreciation on Car is allowed to be claimed @ 15% every year. This will again
reduce the taxable profits even further and decrease the tax liability.
If the Car is used for both business as well as personal purposes, then we’ll have to apportion the interest and depreciation expense mentioned above in the ratio in which it is used for Business and Personal purpose.
Thus,
if the car is used 50% of the time for business purpose and 50% of the time for
personal purpose, only 50% of the above mentioned expenses would be allowed to
be claimed as a business expense.
Related Articles
Section 80E Income Tax Deduction or Interest on Education Loan
An education loan helps you finance your foreign studies and save you a lot of tax as well. If you have taken an education loan and are repaying the same, then the interest paid on that education loan is allowed as a deduction from the total income ...Section 80EE Income Tax Deduction for Interest on Home Loan
Section 80EE allows income tax benefits on the interest portion of the residential house property loan availed from any financial institution. You can claim a deduction of up to Rs 50,000 per financial year as per this section. You can continue to ...Home Loan Benefits in Tax
Home Loan Benefits in Tax A home loan comes with several benefits related to taxes, which can significantly reduce the financial burden of owning a property. These benefits vary by country, so I'll provide a general overview of the common tax ...Income Tax benefits available for education
Education has the potential to improve the quality of life of individuals in geometric progression velocity. The government also provides certain reliefs to the taxpayers in this respect. Let us discuss the benefits available under the income tax ...Section 80EEA Deduction for interest on home loan
Under the objective “Housing for all”, the government has now extended the interest deduction allowed for low-cost housing loans taken during the period between 1 April 2019 and 31 March 2020. Accordingly, a new Section 80EEA has been inserted to ...