Tax Benefits on a Car Loan

You get tax-benefits on repayment of many types of loans. For home loans, we get tax benefit principal repayment under Section 80C and for interest payment under Section 24. If you have taken an education loan, you get tax benefit for interest payment under Section 80E of the Income Tax Act.

Do you get any tax benefits for repayment of car loans? This question will interest several buyers since the cars are expensive and many buyers borrow to fund such purchases.

The answer is Yes and No. The answer depends on the following 2 aspects:

  1. What you do
  2. The type of car you want to buy

If you are a salaried person, then you don’t get any tax benefits on car loan repayment unless you are buying an electric car. We will come to electric cars later.

Tax Benefits for Self-Employed or Business Owner

If you are a business owner or self-employed and use the car for business/commercial purposes, then you have avenues for claiming tax benefits for purchase of car. If you have bought the car for your business, then you can claim the interest payment as a business expense. Plus, you can claim depreciation on the car and set off expenses towards fuel and maintenance.

Sales – Expenses = Profit

You pay taxes on profits. Any expenses will reduce profit and thus taxes. Why such benefits? Well, the car is part of the business/profession and thus such expenses are treated at par with any other expenses incurred to run the business. In this case, interest on car loan and fuel/maintenance are legitimate expenses. Depreciation on capital assets is a common norm.

Do not try to game the system. i.e., use the car for personal work and show as business expense. These adjustments/tax benefits are permitted only if you are using the car for your business/profession.

Here are a few conditions you must meet:

  • The car must be registered in the name of the business or business owner or self-employed person.
  • The car must be used for only business purposes. Your tax claim can be rejected if the assessing officer believes that the car has not been used for business/professional purposes.

Tax Benefits on Car Loan for Purchase of Electric Car

There are tax benefits on loans to buy electric cars. And these tax benefits are for everyone. Does not matter whether you are salaried or self-employed or you use the car for personal or business work. The tax benefit is under Section 80 EEB.

You can take tax benefit (deduction) of up to Rs 1.5 lacs per annum on interest payment towards a car loan subject to following conditions:

  • The loan is taken to purchase an electric vehicle. Applies to both 2-wheelers and 4-wheelers.
  • The loan is sanctioned between April 1, 2019, and March 31, 2023.
  • The loan must be taken from a bank or a deposit-taking NBFC or a systemically important NBFC.
  • The tax benefit is available only to individuals. The tax benefit under Section 80EEB is not available to an HUF, partnership, or a company.
  • The tax-benefit is only for interest payment and not for principal repayment.

To avail tax benefit under Section 80EEB, there is no bar on end use. You can use the car for both personal and business purposes. If you are using the electric car for business and have paid more than Rs 1.5 lacs in interest in a year, the excess can be shown as business expense.

What Is an Electric Vehicle?

Section 80EEB also provides the definition of Electric vehicle.

“Electric vehicle” means a vehicle which is powered exclusively by an electric motor whose traction energy is supplied exclusively by traction battery installed in the vehicle and has such electric regenerative braking system, which during braking provides for the conversion of vehicle kinetic energy into electrical energy;

Since the vehicle must be powered exclusively by an electric motor, you won’t get any tax benefit for repayment of loan taken to buy a hybrid car that can be powered by both electricity and conventional fuel (ICE). The tax benefit is not applicable to petrol or diesel cars or even for hybrid cars.

Additionally, the section 80EEB makes no distinction between a 2-wheeler and a 4-wheeler. Hence, the loans taken to buy electric 2-wheeler will also be eligible for tax benefit.

Can I Claim Input Credit for GST Paid at the Time of Purchase?

Again, this is only relevant for business owners and professionals. And for all types of cars (and not just electric cars). If you run a business, you collect GST from your customers and pay GST to your vendors.

Your final GST liability = GST collected from customers – GST paid to vendors.

Since the car is going to be used for a business purpose, can you use the GST paid during car purchase to set off your GST liability? This would be a huge saving if you could do that. Unfortunately, such set-off is allowed in only very specific cases. You can claim GST input credit if the seating facility is more than 13 passengers.

The only exceptions to this rule are when:

  • You are in the business of buying and selling cars.
  • You run a taxi business and engaged in transportation of passengers.
  • You have bought the car for driving school.

Before claiming car interest as business expense or GST input credit, please consult a Chartered Accountant to check your eligibility.

Editor’s Note: If your end goal is to reduce expenses or save money, you can get a loan for a second hand car too.

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