Taken a Loan? There’s a Big Tax Advantage Hidden in It—Experts Explain Home, Education, Car and Personal Loan Rules

Taking a loan is often seen as a financial necessity, but with the right planning, it can also become an effective tool for saving tax. Indian income tax laws offer several benefits on different types of loans, provided borrowers understand where exemptions apply and where caution is required. Knowing these rules can help taxpayers make smarter borrowing decisions and avoid costly mistakes.

As tax expert Balwant Jain explains, borrowing is an integral part of financial life. When aligned with tax planning, loans can reduce tax liability significantly—especially under the old tax regime. Here is a detailed, expert-backed explanation of how tax benefits work on home loans, education loans, vehicle loans, and personal loans.

Tax Benefits on Home Loans

Home loans offer the most substantial tax relief under the Income Tax Act. Under Section 24(b), interest paid on loans taken for purchasing, constructing, repairing, or reconstructing a property qualifies for tax deduction. This benefit applies to both residential and commercial properties.

Notably, expenses such as processing fees and prepayment charges related to home loans are also treated as interest for tax purposes and qualify for deduction. Importantly, the loan does not necessarily have to be taken from a bank. Even loans borrowed from friends or relatives may qualify, provided the taxpayer can prove that the money was used for the specified housing purpose.

The amount of deduction depends on whether the property is self-occupied or let out and on the tax regime chosen. Under the old tax regime, interest on a let-out property is fully deductible. For self-occupied property, the maximum deduction is capped at ₹2 lakh per year.

If a taxpayer owns more than two self-occupied houses, only two can be treated as self-occupied, while the rest are considered “deemed let-out.” In such cases, notional rental income must be declared, but the entire interest paid on the loan remains deductible. To maximize tax savings, experts suggest declaring the property with lower interest as self-occupied when interest exceeds ₹2 lakh.

Loss from house property can be set off against other income up to ₹2 lakh in the same financial year. Any remaining loss can be carried forward for eight years, but it can only be adjusted against income from house property.

For under-construction properties, interest paid before possession can be claimed in five equal installments starting from the year of completion. However, for self-occupied houses, this deduction also falls within the ₹2 lakh limit. If the property is sold within five years of possession, the remaining installments cannot be claimed.

Under Section 80C of the old tax regime, repayment of home loan principal qualifies for deduction up to ₹1.5 lakh, along with other eligible investments like life insurance premiums, EPF, ELSS, stamp duty, and registration charges. However, if the property is sold within five years of possession, the deductions claimed earlier are added back to income in the year of sale.

Under the new tax regime, no deduction is available for interest on self-occupied property, and principal repayment is also not eligible for tax benefits.

Education Loan Tax Benefits

Education loans enjoy tax relief under Section 80E. The deduction is available only on the interest component, not on principal repayment. There is no upper limit on the amount of interest eligible for deduction.

The benefit is available for a maximum of eight consecutive years, starting from the year in which interest repayment begins. If the loan tenure exceeds eight years, no deduction is allowed beyond this period, making it advisable to plan loan repayment accordingly.

The loan must be taken for higher education pursued after senior secondary level, including recognized part-time or diploma courses. The deduction is available only to individuals and can be claimed for loans taken for self, spouse, children, or a legal ward.

To optimize tax savings, the interest deduction should ideally be claimed by the person in the higher tax bracket. For flexibility, experts recommend taking education loans jointly in the name of parents and students. The loan must be taken from a financial institution or approved charitable institution—loans from friends or relatives do not qualify.

Vehicle Loan: Limited Tax Relief

For salaried individuals, vehicle loans generally do not offer tax benefits. However, if the vehicle is used for business or professional purposes, the interest paid and depreciation on the vehicle can be claimed as an expense in proportion to business use. This also applies to individuals engaged in commercial transport or taxi services.

Personal Loan and Credit Card Loan Rules

Personal loans and credit card loans usually do not qualify for tax benefits. However, if the borrowed amount is used for specific purposes such as providing margin money for a home or purchasing a business asset, the interest may be deductible based on actual usage, provided proper documentation is available.

Experts caution that principal repayment on personal loans does not qualify for deduction under Section 80C, as these loans are not taken specifically for housing construction or purchase.

Final Word from Experts

Loans, when structured wisely, can offer meaningful tax savings. However, the benefits depend heavily on the loan type, purpose, tax regime, and proper documentation. Understanding these nuances before borrowing can help taxpayers reduce tax liability while staying fully compliant with the law.