Union Budget 2019 announced an exclusive tax benefit of Rs 1.5 lacs for loans taken to purchase electric vehicles. Good news for those who plan to purchase electric bike or car in the next few years. The tax benefit is under Section 80EEB. I briefly touched upon the tax benefit in my post on Union Budget. In this post, I will look into the real tax benefits that the announcement translates to.
What Is the Tax Benefit under Section 80EEB?
Under Section 80EEB, you can get tax benefit of up to Rs 1.5 lacs for the interest paid towards the loan taken to purchase an electric vehicle. The benefit is available for purchase of both electric bikes and car. To get the tax benefit under Section 80EEB, you must satisfy the following conditions.
- The loan for the purchase of electric vehicle must be sanctioned between April 1, 2019 and March 31, 2023.
- The loan must be taken from a financial institution.
If your loan satisfies these conditions, you will be eligible for tax benefits on interest payment until you close the loan.
What Is the Real Benefit That This Translates To?
Any tax benefit is useful. However, you must appreciate the following aspects that will affect the tax benefits you get.
- Unlike a home loan, a car is not a very big ticket purchase. Here is the latest on prices of electric cars and bikes on ZigWheels. There are not too many choices in the four-wheeler segment at the moment. However, with this tax benefit and the GST cut on electric vehicles from 12% to 5%, you can see more action in this space. Even though prices of various models of electric cars will vary, the loan for the electric car must be about 15 lacs for you to get the full tax exemption (at 10% p.a. cost of loan).
- Car loans are also medium-term loans (5-7 years loan tenure). Shorter tenure means the principal goes down very fast. This also implies that the interest paid goes down quickly.
The quantum of tax benefit will depend on the cost of your electric vehicle (quantum of your car loan) and your marginal income tax rate. As with any tax deduction, the absolute benefit is the highest to those in the highest tax brackets (for the same amount of interest paid).
Let’s consider an example. You take a loan of Rs 15 lacs to purchase an electric car. The interest rate is 10% and the loan tenure is 5 years. Loan EMI will be Rs 31,870. Here is how much you will pay in terms of interest on this loan.
|Year||Interest Paid during the year||Loan Outstanding at the end of the year|
|Total Interest Paid||4,12,234|
Even for a Rs 15 lacs loan, the total interest paid is just Rs 4.12 lacs. You were not able to hit exhaust the tax benefit for any of these years even for a Rs 15 lac loan. Rs 15 lacs means the cost of the car would be somewhere around 18-20 lacs. And that’s not a cheap car for the most of us. For a taxpayer in the 30% tax bracket, this will result in tax savings of Rs 1.23 lacs (before cess and surcharge) over the loan tenure. For an investor in the 5% tax bracket, the tax saving is about 20,000 over the 5 years. Whether an investor in the 5% tax bracket can/should take a loan of Rs 15 lacs is a different matter. For a Rs 10 lac loan, the interest cost will be Rs 2.74 lacs.
The tenure for the two-wheeler loans can be even shorter. Let’s assume you take a loan of Rs 1 lacs at 10% to purchase an electric bike or scooter. The loan tenure is 3 years. EMI will be Rs 3,226. The interest paid during these 3 years will be Rs 16,162. Tax Saving of Rs 4,848 for the taxpayer in the 30% tax bracket and Rs 808 for a taxpayer in the 5% tax bracket.
As you can see, because of shorter tenure of car and bike loans, the tax benefits seem a bit muted. That’s just my perspective. By the way, don’t purchase an expensive electric car just in order to get greater tax benefits. That would be quite foolish, wouldn’t it? There are far more important parameters that would determine your choice — your preference for environment friendly vehicles, vehicle usage, overall running and maintenance cost, the infrastructure in your city to support such vehicles and, of course, the cost.
Are There Any Special Loan Products for Electric Vehicle Loans?
I could not find any special loan products. There is no reason for such loan products either, except for marketing gimmicks. I read about SBI Green Car loan a few months back. Unfortunately, the banks manage a number of press releases, but do not provide much information on their websites. As per the press release, the interest rate was lower by up to 20 bps. However, with the introduction of tax benefits on such loans, this discount of a few basis points may vanish.