3 types of loans that can help reduce your tax liability.
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March 1, 2019
How to save taxes - this seems to be the question on everyone’s mind as the financial year draws to an end. For some, tax-free investments are the answer, for others rent allowance serves the purpose, but did you know that certain loans can also help you fight the tax monster? That’s right, repaying certain loans can unlock significant tax benefits! Confused? This article will give you get a better understanding by highlighting 3 types of loans that can be used to avail tax benefits. Hopefully, it will help you hold onto to more of your hard-earned money as you go into the new financial year.
1. Home loans
If you are currently repaying a home loan, you can use the principal amount and the interest amount paid in the current financial year to unlock a truckload of tax benefits. Just the principal repayment can help you with deductions up to Rs. 1, 50,000 on your taxable income. Further, the interest payments made towards a housing finance loan can also be used to claim deductions up to Rs. 2, 00,000 on your taxable income. Both these benefits are made possible under section 80C and 24 of the Indian Income tax Act, respectively.
2. Education loans
If you’ve taken an education loan for yourself or one of your children, you can use the interest amount paid in a year to claim deductions on your taxable income. However, unlike home loans, there is no limit on the amount you can claim for deductions. So whatever you pay as interest, you can use it to claim an equal amount of deductions, without any capping or upper limit!
3. Personal loans
A personal loan does not directly provide any tax benefits. However, you still might be able to claim some deductions or claim some tax benefits with one, but this depends on the end use of the funds. For example, if you use it to cover the purchase, construction or renovation of your home, then the interest amount incurred can be used to claim deductions up to Rs. 2, 00,000; as is the case with a home loan.
The interest of a personal loan can also be claimed as a deductible expense if it is used as an investment in business. In this case, it will be treated as an expense that brings down the net profit of the business. The best part is that, the entire interest amount can be treated as an expense as there is no limit on the amount you can claim as deduction.
So there you have it, 3 types of loans that can bring down your tax liability at the end of the financial year. It wouldn’t make sense to opt for any of these loans just to bring down your taxable income. However, if you already have one of these loans, then you must use them to your advantage. Alternately, if you are planning to buy a home, study further or invest in your business, know that these loans are the best way to fund your decision and they will also help save on taxes in the future.
Hope this has been helpful, good luck and all the best!
