How to Claim Tax Benefits on Car Loans?

Car Loans can easily help you in purchasing a vehicle for personal or professional use. But like other types of loans, such as Home Loans and Education Loans, are there tax benefits on Car Loans too? Let’s take a look -

As per the tax laws in the country, cars are treated as luxury products. This is a reason why they fall in the highest GST slab. As cars are a luxury and not a necessity, there are no Car Loan tax benefits if the purchase is made for personal use.

But if the vehicle is purchased for commercial or professional use, there are a few ways in which you can claim a tax deduction. For instance, the interest component of the amount you repay to the lender can be treated as a business expense for reducing the taxable income.

As mentioned above, the Car Loan tax benefit is available on vehicles purchased for commercial use. So, a self-employed professional like a lawyer, doctor, architect, CA, or business owner can be eligible for a tax benefit on purchasing a car through a Car Loan.

However, there is no Car Loan tax benefit for salaried employees as they purchase the vehicle for personal use.

Here are some of the ways to claim Car Loan income tax benefits-

• Treating Car Loan interest as a business expense

• Showing the vehicle in your books as a depreciating asset and treating the depreciation as a business expense

• If the car is used for commercial use and self use, interest and depreciation can be divided based on commercial and personal use to claim the Car Loan tax benefit on the commercial component.

Let’s understand this with an example.

Mr Ranjit, a business owner, purchased a car for commercial use through a Car Loan. The vehicle cost was INR 25 lakhs, and he took a Car Loan of INR 20 Lakhs @ 10% p.a. for a tenure of 1 year.

If his taxable profit for the year was INR 50 lakhs, he can deduct INR 2 lakhs (10% of INR 20 lakhs) and only pay applicable income tax on INR 48 lakhs.

There are no Car Loan tax benefits for salaried employees. However, you can claim deductions when filing tax returns if you're a self-employed professional or business owner.

The interest paid on loan should be shown as a business expense while filing the tax returns. However, you’ll need an interest certificate from your loan provider to claim the deduction.

EVs or Electric Vehicles are gaining extensive popularity in the country. Apart from being eco-friendly and efficient, EVs also come with tax benefits. Under Section 80EEB of the IT Act, if you take a Car Loan to purchase an electric car, you can claim a tax deduction of up to INR 1.5 lakhs in a year against the interest component of the loan.

However, it is worth noting that this Car Loan tax deduction is available to individuals purchasing an electric car for personal or commercial use. Other taxpayers, like companies, HUFs, partnerships, etc., cannot claim this deduction. Also, you can only claim the deduction on Car Loans approved between April 1^st, 2019, and March 31^st, 2023, for purchasing EVs. 

• If you’re purchasing a new car for business or commercial purposes through a Car Loan, you are eligible for a Car Loan tax exemption.

• However, such exemptions are not available for cars purchased by salaried employees for personal use.

• But if you’re a salaried employee, you can make an environment-friendly and tax-efficient decision by investing in an EV.

AU Small Finance Bank offers Personal and Commercial Car Loans for new and used vehicles at competitive interest rates. With easy documentation, quick processing, and flexible repayment tenures, the Leading Small Finance Bank enables you to fulfil your dream of owning your favourite four-wheeler.

Read More: Best Short-Term Investments with Income Tax Benefits