He is poor. His neighbour is poor. How do they manage? They borrow from each other.” Read during my college days, the above lines clearly bring out the importance of borrowing in day-today life. Almost all of us must have taken loans sometime in our life, be it education loans, home loan, car loan or personal loan. Tax laws let you take benefit for interest and principal repaid for some loans depending on your source of income and purpose. So, what should be our stance when it comes to taking loans?

Tax benefits for home loan: Under section 24(b) of the Income Tax Act you can claim the interest for loans taken for buying constructing or renovating/repairing a property. This deduction is available for all taxpayers as well as for all types of houses, be it residential or commercial. Most of you would not be aware that even processing fee as well as prepayment charges is also covered in the definition of interest under tax laws. So, you can claim these payments as well. For claiming interest, it’s not necessary that the loan should be taken from a bank or a financial institution. Even interest paid to friends and relatives on loan taken for this purpose can be claimed provided you are able to establish the direct nexus between money borrowed and its end-use.

The quantum of deduction under this provision depends on whether the property is let out or is being used for self. In respect of the self-occupied house, you can claim deduction up to Rs 2 lakh of interest. In case you own and use more than one house for self-use, all properties except one, at choice, are treated as let out. So, for a let out property or a property that is treated as let out, there is no restriction on the quantum of interest you can claim. But there is a restriction of Rs 2 lakh of loss under the head ‘income from house property’, for all properties taken together, which you can set off against any other income. So, any loss to the extent not be set off during the current year, can be carried forward for set off against the house property income of 8 subsequent years. Also, there is no absolute restriction in respect of interest up to which you can claim it for let out properties but restriction is as regards your entitlement to set off of loss under this head against your other income during current year.

In respect of a property self-constructed or one booked under construction for which possession is yet to be taken, the interest paid till the year prior to taking possession is allowed to be claimed from the year in which possession is taken. It can be claimed in five equal annual instalments within the limits explained above. In case you sell the under-construction property before taking possession, logically you can include such interest in the cost of house for capital gains purposes. In case you sell the property after taking possession but before completing five years the claim for remaining year gets lost.

In respect of principal repayment of home loan, taken from specified institutions like banks, housing finance companies, for buying or constructing a residential house property, section 80C allows an individual and a Hindu Undivided Family claim up to Rs 1.5 lakh. This deduction is available with other eligible items like Public Provident Fund (PPF) contribution, National Saving Certificates (NSC), tuition fee, Employee Provident Fund (EPF) contribution, life insurance premium and equity-linked savings scheme.

Deduction for education loan: For education loan taken from bank or charitable trust, you can claim full interest for 8 consecutive years from the year in which you start paying it. The deduction is available on payment basis, so in case you pay the interest for earlier years in a single year, the benefit for whole of such interest is available in the year. The deduction can only be claimed for education loan taken for pursuing any government-recognised course after higher secondary examination. Even part-time course or a diploma course qualifies for this deduction if the institution imparting such course is recognised. Since this benefit can be claimed for education of yourself, spouse or your child, it is advisable to take education loan in joint names and to claim interest by the person with higher tax slab rate.

Interest on car loan: Salaried people cannot claim any tax benefits for car loan. But self-employed can claim the interest paid on car loan if the car has been used in business or profession. If you are engaged in transportation business, the full interest paid can be fully claimed for vehicles used in the business bought with car loan.

Personal loan or loan on credit card: Generally no tax benefits are available for personal loan. But if the amount of personal loan has been used for the purpose of buying a house or repairing house and a direct nexus is established between the personal loan and the end-use, the interest on personal loan, to the extent of its use for this purpose, can be claimed. The benefit for repayment of personal loans cannot be claimed under section 80C, as the money borrowed is not for specific purpose of buying or constructing a house. Likewise self-employed can also claim interest on personal loan and credit cards it is used in the business.

(The author is a tax & investment expert and can be reached at jainbalwant@gmail.com)