How Professionals and Business Owners Can Avail Tax Benefits on Car Loans in India

November 3, 2024 By: Shalini Bhardwaj

While home loans come with clear tax benefits, did you know that certain car loans can also offer tax advantages? For professionals like doctors, lawyers, or engineers and business owners who use their vehicles strictly for work, the Income Tax Act allows for deductions on car loan interest and certain expenses. Here’s a guide on how you can maximize your tax benefits on car loans if you use them for business purposes.

Why Car Loans Are Treated Differently

Unlike a home loan, where you’re building an asset that’s often considered essential, cars are usually viewed as luxury items under the tax laws. For most individuals, a car loan doesn’t qualify for tax benefits. However, if you’re a professional or business owner, the car loan interest can be deducted as a business expense if the vehicle is used solely for work purposes. This provision helps individuals who rely on a vehicle for their livelihood reduce their taxable income.

Key Tax Benefits Available for Business and Professional Car Loans

1. Interest Deduction on Car Loans
   • The interest paid on a car loan can be shown as a business expense if the vehicle is used entirely for work purposes. This deduction helps lower the taxable income, offering some relief.
   • To claim this deduction, you must show the interest component as a business cost in your income tax return. Only the interest on the loan is deductible, not the principal.
2. Fuel and Maintenance Costs
   • You can claim tax benefits not only on the loan interest but also on fuel and maintenance expenses. These costs, like petrol, diesel, or servicing, can be claimed as business expenses, reducing your taxable income further.
   • However, the benefit is capped, and you can only claim a limited percentage of the fuel and maintenance expenses depending on the Income Tax Act’s guidelines.
3. Depreciation Benefits
   • Since the car is being used for business, depreciation can also be claimed as a tax-deductible expense. The depreciation rate on cars used for business purposes is typically 15-20% annually. This means that over time, you can reduce the car’s book value, which in turn lowers your taxable profit.
   • The depreciation deduction applies to the original cost of the car, spreading the cost over a few years and helping offset business income.

Example of Tax Savings

Let’s say you’re a professional with an annual income of Rs 10 lakh and pay Rs 70,000 in interest on your car loan. If your vehicle is used exclusively for business, you can claim this interest expense, effectively lowering your taxable income to Rs 9.3 lakh. Add the additional deductions on fuel, maintenance, and depreciation, and your tax savings could increase even more.

Important Things to Keep in Mind When Claiming Car Loan Tax Benefits

1. Proof of Business Use

• Only cars registered for business or professional use qualify for these benefits. If the vehicle is used for both personal and professional purposes, you may have difficulty substantiating a claim for the full deduction.
• Ensure you keep all documents and proofs, as the Income Tax Officer might request verification of business use.

2. Interest Certificate from Bank

• To claim the interest deduction, request an interest certificate from your bank. This document will detail the interest paid over the financial year, which is essential for your records and claim process.

3. Penalties for False Claims

• If you falsely claim business use for a personal vehicle, there’s a risk of penalties. If caught, you could face late payment fees, interest on unpaid taxes, and additional fines.

Advice from Tax Experts: Claim Carefully and Maintain Documentation

Tax experts advise that taxpayers should be meticulous with their records. Balwant Jain, a tax expert, emphasizes that claiming tax benefits on car loans must be done with caution, as the Income Tax Department may investigate the claim thoroughly. The authorities are strict about ensuring that such deductions are legitimate, and they may impose penalties on false claims.

In summary, while cars are typically viewed as luxury products, professionals and business owners can still save on taxes if they use the vehicle exclusively for work. From loan interest to fuel costs and depreciation, these deductions offer a way to offset business income, bringing down overall tax liabilities.