We have tax benefits everywhere. We go around looking for offers, every discount we can find, just so we can reduce expenditure and save some more. In the same way, you have got to find ways you can reduce what you pay off, or at least claim the benefits that are out there for you. The same stands by when you take out a car loan. Did you know that a car loan has tax benefits that you can enjoy? Here we will talk about how you can claim these tax benefits. But before that, let us know some more details. Even when you take out an education loan or any other, there are benefits to it. Here is more about the tax benefits you have on your car loan.
Things you Need to Know About the Tax Benefits of Car Loans
- In order to be eligible to claim a tax deduction on the car loan, you need to utilise the car for real business, and only for business purposes.
- The IT officer is given the power to veto the deduction if he or she believes that you have not used the car for your business or for professional causes.
- The car should be registered in the same name as the business or the owner.
You have probably heard what are taxable perquisites and how your salary fringe helps you. Just like all of those tax benefits, you should also enjoy the tax benefits on your car loan.
How to Claim Tax Benefits on a Car Loan?
There are two ways you can claim tax benefits on your car’s loan. They are mentioned below.
- When you are self-employed or a business owner, this is how you need to claim your car loan income tax benefits.
Step 1: You need to show the proof of use of the car for your business.
In order to claim the tax exemption from income tax, you have to show that you are actually using this car for your business or your self-employment processes, and you are not using it for personal reasons.
Step 2: Tax benefits can be claimed on interest.
You can claim your car’s loan tax benefits on the interest but not on the principal amount that you had borrowed.
Let’s look at an example to understand this better.
Let us say you are the owner of a business, and you bought a car for commercial purposes. In order to buy that, you took a loan of Rs. 10 lakhs at the rate of 12% interest annually. When your taxable income from the business is Rs. 30 lakhs for a year, Rs. 8.8 lakhs can be deducted from your yearly income when you pay tax. So, for the year, you will only have to pay tax for Rs. 21.2 lakhs.
Given the car was bought for business purposes, the loan interest you pay for the car loan can be listed as your business expense while filing ITR.
You can also request your bank to issue you the interest certificate. The certificate will show you the amount you have paid as interest on your car loan and will help claim tax benefits on that loan you took.
- The second way you get to claim tax benefits on your car loan is this.
Apart from the tax benefits you receive on your yearly income while paying interest on the loan, you can also claim tax benefits by showing the car as a depreciating asset.
What is a depreciating asset?
A depreciating asset is a commodity where the price sees a gradual reduction as time passes. If you show your car as this Asset, you can also claim tax benefits on it by showing the depreciation as an expenditure. This depreciating expenditure is exempted from taxes, even if you bought the car without taking out a loan.
In our country, Loans and tax deductions go hand in hand. You can avail of tax exemptions for home loans, education, and even personal loans.
But you have to remember that if you are a salaried employee, you cannot claim tax benefit.
Importance of Tax Saving
At that point in your career, it’s easy to forget that tax planning is an important component of the income tax process.
The advantages of tax savings may appear insignificant. This, however, can often set a negative precedent for years to come.
As your career signs off progress and your income rises, tax savings should become a more important part of your annual tax preparation.
Higher salaries are subject to higher tax rates, so it’s a good idea to set aside as much of your hard-earned money as you can.
As a result, the importance of making critical investments that can reduce your tax burden for years to come should be instilled as early as possible in your career.
Conclusion
Just other than getting the deduction on your interest, you can also get the tax benefits on depreciation of the car and several other expenses like fuel and maintenance of the car for your business.
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