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How to claim tax benefits on Auto Loans?
Car Loan tax benefits are often overlooked in vehicle financing, yet they hold the potential for notable financial advantages. Consider the case of a professional who has expanded their business operations across multiple locations. By opting for a vehicle financed through a Car Loan, they're not just facilitating their passion for driving and enhancing their business mobility but also positioning themselves to harness the tax benefits of such a loan.
Tax benefits on Car Loans
In India, cars are classified as luxury items and are subject to a high Goods and Services Tax (GST) rate of 28%. Due to this classification, individuals purchasing cars for personal use cannot claim tax deductions on their Car Loans.
However, there's a silver lining for those purchasing vehicles for business purposes. If you're buying a car for commercial use, you can leverage the interest paid on your Car Loan as a deductible business expense. This deduction can reduce your overall taxable income. It's important to note that this tax relief applies solely to the interest part of the loan and not to the principal amount.
Benefits available to self-employed professionals and business owners
When it comes to reaping financial rewards, self-employed professionals and business owners have the upper hand with car loans. Here are the prime benefits neatly outlined for quick scanning and better understanding:
- Deduction on interest: Professionals like doctors, lawyers, and architects can reduce their taxable income by claiming the interest paid on car loans if the vehicle is used for business purposes. This is a prime Auto Loan tax benefit.
- Depreciation benefits: A car used for business can be listed as a depreciating asset, allowing for a reduction in taxable income over time.
- Authority verification: Remember, it’s the tax officials who hold the cards when it comes to confirming the business use of your vehicle. A car used for personal activities may not qualify for these tax advantages.
How do you claim a Car Loan tax benefit?
To make the most of the Car Loan for tax exemption, your vehicle should be used for genuine business purposes. You should add the cumulative interest paid throughout the year to your business expense deductions during tax filing.
For an accurate account of the interest paid, obtaining an interest certificate from your lender is advisable. This certificate is crucial as it details the exact amount of interest you’ve paid, enabling you to accurately claim the Car Loan for tax exemption on your tax returns.
Tax benefits only on the interest paid
Let us take an example to understand the Car Loan benefit in income tax. Say a business proprietor acquires a vehicle for company use with a loan of ₹10 lakhs at an interest rate of 12% annually. If the business's taxable income for the year amounts to ₹30 lakhs, then the interest – which is ₹1.2 lakhs (12% of ₹10 lakhs) – can be deducted from the taxable income. Consequently, the taxable income is effectively reduced to ₹28.8 lakhs for that fiscal year.
Thus, if the car is procured strictly for business operations, the interest paid on the Car Loan is recognised as a legitimate business expense during the income tax filing process.
To substantiate this deduction, obtaining an interest certificate from your bank is advisable. This certificate provides a breakdown of the interest paid on your Car Loan over the year and serves as documentation to support your tax benefit claim.
Also Read: How to avail 24x7 Top-Up Car Loan?
Depreciation
Tax rules allow a 15% depreciation on vehicles bought before September 30th, dropping to 7.5% if bought later, with a consistent 15% after the first year. For instance, a ₹25 lakh vehicle bought for business can get a ₹3.75 lakh deduction.
With Axis Bank's Car Loan, you can finance your vehicle up to 100% of the on-road price, starting at just ₹1 lakh, and enjoy competitive rates and rewards. Start your car ownership journey with Axis Bank.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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