Tax Deductions For Home Loans and Education Loans
It is that time of the year again when you put every investment that you made over the course of the year into perspective: How much tax can I save? Various investments we have made over the course of the year contribute significantly to our income tax savings. Often times, a simple liability in the form of a personal loan can be substantial when it comes to planning your income tax for the year.
However, not all personal loans qualify you for tax benefits. Only the interest paid on education loans and home loans are exempted from taxation. The entire interest you pay on these loans can be claimed as a deduction, while calculating your tax. And these can translate into tidy savings, in the long run. Let us look at specific instances of these personal loans, and how tax deductions work in each case:
- Home Loans: You can be eligible for tax deductions from your home loan, once you gain possession of the house. So this means that during the construction period, even if you pay a home loan EMI, you will not be eligible for tax deductions. However, once you have possession of your home, a maximum tax deduction of Rs 150,000 towards the home loan interest payable is allowed under the income tax laws and home loan EMI plan. Let us consider a hypothetical example:Let your total taxable income for the year be fixed at Rs 1,000,000. You have taken a home loan, for which the home loan EMI interest payable for the year amounts to Rs 100,000. This whole amount is tax deductible.Factoring in the tax deductions, your taxable income will reduce to Rs 900,000. With a tax rate of 20%, you would have made savings of Rs 20,000!
- Education Loans: Taking an education loan cannot only help you fund your higher studies, but can also help you save tax. The entire education loan interest on the education loan can be claimed as tax deductions while calculating your taxable income. Only the individual on whose name the loan has been taken can claim this deduction. No tax deduction can be claimed in the name of your parents/spouse/etc. Also, not all education loans qualify for tax deductions. Only education loans taken from approved banks and charitable institutions qualify for tax deductions. So if you take an education loan from a relative, friend or from your employer, this does not qualify for tax deductions. And this tax-benefit is not available for part time courses. Only full time graduate or post-graduate courses in the fields of Medicine, Engineering, Management and Applied Sciences are eligible for these tax savings!
- Let’s assume you have taken an education loan of Rs 1,000,000, which is charged at an education loan interest rate of 8%. This amounts to Rs 80,000 being paid every year as interest.Under the income tax laws, you are now eligible for deductions unto Rs 80,000 from your taxable income. This tax deduction is available for the entire period of the education loan up to a maximum of 8 years, or till the principal and interest have been repaid.
In this way, simple liabilities in the form of a home loan or an education loan can significantly lessen your tax burden!