Loans! Many of us fear the word “loans” and do not want to be in a position where we have to borrow money. Most loans are long-term financial obligations that require repayment and a high interest rate. This is just one aspect of the situation that we observe from the outside. Loans can be a lifesaver in an emergency. They provide funds that will cover most of your short-term financial needs. If managed correctly, they do not have to become a financial burden. There are also loans with tax advantages.
The Income Tax Act of 1961 outlines these tax advantages and they reduce the tax burden for the borrower to a great extent.
These are loans with tax advantages.
Home Mortgages
A Home Loan requires the most financial commitment on your part. The reason for this is that a large amount of money is borrowed and must be paid back over a lengthy period. A home loan does come with significant tax benefits.
Tax benefits on home loans explained:
- Section 80C (Income Tax Act) allows you to deduct the amount of principal that is paid.
- Maximum deduction is Rs. 1.5 lakhs
- There is a tax deduction on the interest paid for a mortgage. You can deduct up to Rs 2 lakhs as an interest from income for self-occupied properties.
- Each borrower can claim Rs 2 lakhs if the loan is taken jointly.
Second home tax benefits:
According to the Income Tax Act, even though first-time buyers can get more benefits from tax, those who buy a second home are eligible for claiming a deduction. It is important to note that if you own more than one home, then only one can be considered as self-occupied. The other properties are considered to be rental (even though they may not have been rented).
The amount of interest that is paid on such a property (house), can be deducted from your tax up to Rs. 2 lakhs. Rent received must be included in the taxable income.
Education loans
Many people cannot afford to pay for higher education out of their own pockets. An educational loan can help aspiring students reach new heights in their academic careers. To encourage more students to pursue higher education and build a stronger nation, the government offers a tax deduction on education loans. To claim it, however, you need to obtain education through a designated bank.
According to section 80E, you can claim a deduction for the interest on the loan.
There is however a time limit for this benefit. It is either eight years, or the entire loan tenure (whichever is shorter).
Personal Loans
Personal Loans can be used for many reasons, from clearing credit card debt to medical emergencies. Personal loans are not tax-free. However, if you use a loan to renovate your house, pay for education or as a down payment on a home, then section 24b of the Income Tax Act allows tax-free benefits.
To be eligible, however, you must provide proof of the use of the loan amount when filing your income tax.
You can see that these three types of loans are not only a way to get cash when needed, but they also offer tax benefits. It’s important to consider your ability to repay the loan before borrowing.
