Car Loan Tax Benefits and How to Claim It
Given the availability of easy car financing options, including new and used car loans, it has become easier to own a car. However, only a few car owners are aware of the tax benefits you can claim through your car loan.
Yes, that’s right!
As long as you are a self-employed individual or a business owner, you can enjoy car loan tax benefits. However, not all car loans are applicable for these tax benefits.
In this post, we will explain how to claim car loan tax exemption for certain types of cars. Keep reading.
Car Loan Tax Benefits Explained
In India, ownership of a vehicle is considered a luxury. Thus, it bears a high goods and service tax (GST) depending on the car category and fuel type. Here are the tax rates applicable to different types of cars:
| Car category | Examples | Tax rates post GST implementation |
| Small cars (<1200cc and length <4m) | Tata Tiago Hyundai Grand i10 Maruti Suzuki Swift | 18% |
| Mid-sized cars (length >4m) | Maruti Baleno Tata Nexon Honda Amaze | 18% |
| Luxury cars (>1500cc and length >4m) | Land Rover Lamborghini Toyota Land Cruiser | 28% |
| SUVs (length >4m and ground clearance >170mm) | Jeep Compass Maruti Vitara Brezza | 28% |
| Electric cars | Kia EV6 BMW i7 2024 MG Comet EV | 5% |
However, keep in mind any car loan interest deduction is off-limits to you if you are buying a vehicle for personal use. Salaried individuals cannot claim these benefits too.
But if you are buying a car for your business purposes, you can show the interest you pay each year on your car loan as a business expense, thus removing it from your gross taxable income.
Note that the car loan tax deduction applies to the interest amount only and not to the total amount of the car loan.
Besides getting a deduction on the interest you pay, you can also claim additional tax benefits on:
● The depreciation of the car
● Other expenses such as fuel and maintenance
You can show these as operational expenses to reduce your taxable income.
How Does the Car Loan Tax Exemption Work
Car loans are considered essential by self-employed individuals and business owners. If you are one of these, you are entitled to a car loan tax benefit, essentially due to how the loan is classified.
You can treat the car loan interest payment as an expense, thereby decreasing your taxable income by the amount of loan interest paid during that year.
Let’s explain this with an example. Suppose your annual professional or business income is INR 40 lakhs, and you have taken a car loan of INR 15 lakh at 12% per annum for 5 years. Obviously, you will incur expenses when paying off the car loan.
In this case, you will roughly pay INR 5 lakh as interest. If you pay an EMI of INR 33,367 per month, you’ll roughly pay interest of INR 1,41,508 in on financial year.
As a result, you can deduct this amount from your total taxable income by claiming the car loan tax benefits. So, you will be taxed for INR 38.5 lakhs (INR 40 lakhs – INR 1.41 lakhs).
Note:
● The car must be registered in the your name (if you run a proprietary firm or offer services as a practising professional) or in the name of the business.
● To be eligible to claim tax deductions on your car loan, you must use the car for legitimate business purposes.
● The IT assessing officer has the right to revoke the deduction if they doubt you you have not used the car for professional or business reasons.
How to Claim Car Loan Tax Benefits
To claim tax benefit on your car loan, you must first file your returns. Include the interest you paid during the year as part of your total business expenses.
To know how much interest you paid in a year, request your bank to issue an interest certificate. You can also look at the principal repayment and interest paid details in your car loan repayment schedule. That will clearly tell you the amount you have paid as interest. Keep this document handy for verification.
With a car loan, you can get plenty of benefits. If you’re looking to buy a car to expand your business, apply for a car loan with us. SK Finance offers hassle-free car loans with minimal documentation and flexible repayment options.
Income Tax Benefits for Self-Employed Professionals and Business Owners
Claiming tax benefits of your car loan helps you save money on taxes while enjoying rides of a new or pre-owned vehicle. You can upgrade your lifestyle, attract new clients, and expand your business with a car loan.
If you’re overwhelmed with the long car loan processing timeline at banks or finding it challenging to proof your income stability, visit our nearest branch. We offer car loans for both new and used cars at competitive rates and quick processing.
