Tax Benefits On Car Loans For Salaried Employees You Need To Know
In recent years, car loans have emerged as a convenient means to finance vehicle ownership. Additionally, there are certain tax benefits on car loans for salaried employees subject to specific conditions.
Salaried individuals may be able to claim tax deductions on car loans for using the vehicle for business-related purposes. This comes under the head of reimbursements provided by the employer. Understanding the eligibility and applicable conditions is essential for you to make well-informed decisions.
Can Salaried Employees Get Tax Benefits on Car Loans?
In general, tax benefits on car loans for salaried employees are not available if used personally. The Income Tax Act classifies cars as luxury assets, and you cannot deduct interest payments from your taxable income. This means expenses like EMIs, fuel, and maintenance do not qualify for tax benefits.
However, salaried individuals may be eligible for a car loan benefit in income tax if they use it for a business commute. For example, if they use the car for official duties and the employer reimburses the EMI, these reimbursements can be tax-exempt.
Car Loan Tax Benefits for Self-Employed vs Salaried
Understanding car loan tax benefits for salaried vs self-employed is helpful when planning your finances. Here is how the eligibility and scope differ:
You can treat the interest paid on the loan as a business expense. This helps business owners reduce their taxable income. For example, if A earns ₹20 lakh annually and pays ₹50,000 in interest, A’s taxable income may be reduced to ₹19.5 lakh.
A can also claim depreciation on the car, which further lowers his tax liability. It applies when A uses the vehicle for business-related tasks. It is also applicable if A registers the vehicle in the business's name or a self-employed professional's name.
Fuel, insurance, maintenance, driver’s salary and other expenses are tax-deductible. Keep in mind that there should also be clear records to justify the deductions.
When the employer owns a car and uses it for official purposes, the engine capacity and the person who bears the expenses determine its taxability. If the employer reimburses expenses, a perquisite value of ₹1,800 (for cars with engine capacity ≤1.6L) or ₹2,400 (for >1.6L) is exempt each month.
If the employee bears the expenses, the exempt amount is ₹600 or ₹900 per month. Any amount above these limits may become taxable. These exemptions apply when the vehicle is used for mixed purposes.
Similarly, if the employer pays for expenses for a vehicle they use for personal reasons, the entire amount is taxable. Similarly, when an employee owns a car solely for personal use, there are no direct car loan tax exemption benefits. To claim any deductions, the vehicle must be used for business or professional purposes only.
Understanding Interest Deduction in Income Tax
Car loan interest deduction in income tax computation lowers your taxable income, but its applicability varies. There are no standard car loan tax deductions for salaried individuals. Only self-employed professionals or business owners can claim a tax benefit.
Here is how you, as a business owner, can claim this benefit:
Tax Benefit on Electric Car Loans (EV Loans)
Under Section 80EEB of the Income Tax Act, you can claim a tax benefit on an electric car loan. You can get a tax deduction of up to ₹1.5 lakh on the interest paid on a loan for an electric vehicle (EV). This benefit is only available to individual taxpayers, irrespective of being a salaried employee, self-employed, or a business owner.
To qualify, ensure that you obtained the loan between April 1, 2019, and March 31, 2023. Also, the vehicle you bought on loan should be fully electric and not hybrid. You can claim this deduction only if the loan is taken from a recognised financial institution or NBFC.
Documentation Required for Claiming Car Loan Tax Benefits
To successfully claim car loan tax benefits, you need to maintain proper documentation. These documents serve as proof of the loan's purpose, usage, and interest paid. They include:
Electric Vehicle Loan Documentation
To claim tax benefits under Section 80EEB for an EV car loan, you must submit specific documents. These will verify your loan and vehicle purchase details. Below are the key documents required:
Maximise Car Loan Tax Benefits Legally
For salaried employees, tax savings on car loans are limited unless it is an EV or used for business purposes. To ensure you are making the most of all possible deductions, keep all documents ready before filing your ITR.
Frequently Asked Questions
1. Are there any tax benefits on car loans for self-employed or business use?
Yes. The interest paid on a car loan can be claimed as a business expense. It reduces the taxable income; however, you must have valid documents to support your claim.
2. Can company-leased cars offer tax benefits to salaried individuals?
Yes. The company-leased car can offer tax benefits to salaried individuals as well as self-employed individuals.
3. Is GST input credit available on car loans?
Yes. GST input tax credit is available on car loans if vehicles are for commercial use, such as rental, transport.
4. Are electric car loans eligible for tax deductions?
Yes. As per Section 80EEB of the Income Tax Act, you can claim tax benefits on electric car loans of up to ₹1.5 lakhs per year.
5. Can I claim tax deduction on electric vehicle loans?
Yes. You can claim tax deduction on loans taken to purchase electric vehicles under Section 80EEB of the Income Tax Act. The limit for this exemption is up to ₹1.5 lakhs per year.
6. Is there any tax exemptions on car loan EMIs?
The principal component of EMIs is not eligible for the car loan tax deductions under the Income Tax Act. However, you can get a deduction on the interest paid on a car loan if used for business purposes.