How to Get a Tax Benefit for Buying a New Car

Posted on: Jan 10, 2024 | 3 mins | Written by: HDFC ERGO Team

How to Get a Tax Benefit for Buying a New Car

You are buying your first car and are ready to sign the loan papers. But are you aware that you can save money on your new car purchase by availing tax benefits on the car loan? Like any other loan, there are tax benefits available on a car loan. However, these new car tax benefits are available only if certain conditions are met. So keep reading to find all the information about claiming these tax benefits for buying a car.

Tax Exemption on Car Loan

Tax benefits are available on the interest paid on a car loan and can be claimed as an expense if the car is purchased for business purposes under section 80C of the Income Tax Act. However, if the car is purchased for personal use, the tax benefit cannot be claimed because a car is a luxury item in India.

Who Can Claim Tax Benefits For Buying A Car

A business owner or a self-employed person can claim a tax deduction on interest paid on a car loan as it is considered a business expense. Hence, the interest paid is deducted from the taxable income.

If a salaried individual buys a car for personal use, he cannot show the interest paid on the loan amount as an expense and hence cannot claim any tax benefit on the car loan interest payment.

How To Claim New Car Tax Benefits

Here is how you can claim tax benefits for buying a car.

1. Whether you are a business owner or a salaried individual, show that you are using the car for business purposes and not for personal use.

2. Include car loan interest as a business expense when filing your Income tax return. Note here that tax benefit is only available on the interest amount and not on the principal amount of the car loan.

3. As a car is a depreciating asset, depreciation of the car is considered a business expense. Remember that depreciation is free from tax whether the car is purchased using a car loan or without a loan.

4. Tax benefits for a car used for both business and personal use can be claimed if the interest payment and depreciation can be calculated in the ratio of personal use and business use of the car. For instance, if the car is used 50% of the time for business, then only 50% of the interest and depreciation can be used as a business expense for claiming tax benefits.

Tax Benefits on New Car Insurance

Business owners can only claim tax benefits on comprehensive car insurance if the vehicle is purchased and used for business purposes because it is considered to be at a higher risk of damage and accidents. A salaried individual cannot claim any tax benefit on a new car insurance premium if it is used for personal work. You can claim tax benefits on new car insurance premiums if you are using the car for business purposes under the given conditions.

1. If the car is being used only for business purposes the employer needs to provide bills, driving records and travelling history to claim tax deductions on car insurance premium

2. If the car is used for both business and personal work, the tax exemption is given according to the car’s cubic capacity.

Can a Salaried Individual Get Tax Benefits for Buying a Car?

Yes, a salaried individual can get tax benefits for buying a car, but only if it is an EV. The government of India offers a tax deduction of up to ₹ 1,50,000 on the interest paid on the car loan taken for buying an electric vehicle, under section 80EEB of the Income Tax Act. This is done to promote the sales of EVs in India.

1. It is a one-time benefit and you are eligible for tax benefits on a car loan for the purchase of your first EV.

2. Note that this benefit is only available to individuals and not to companies or partnerships.

3. The tax benefit on car loans for the purchase of an EV is available only for car loans approved between 1st January 2019 and 31st March 2023.

Conclusion

Now you are aware of the tax benefits you can claim for purchasing a new car, and save money on your car loan interest payment. Make sure you have an interest payment certificate issued by the lender to claim tax benefits. You can further claim tax benefits on new car insurance premiums. Understand the Income Tax rules and make the most of the available new car tax benefits.

FAQs

1. Can a self-employed person get tax benefits on a car loan?

Yes, a self-employed person can claim tax benefits on a car loan if he can show that the car is being used for business work and not for personal work.

2. How can a business owner claim a tax benefit for buying a car?

A business owner can claim tax benefits for buying a car if it is used for business purposes. The car should be registered in the name of the business or the business owner. The tax benefit is available only on the interest value of the car loan and not the principal amount. The interest paid for the car loan is shown as a business expense while filing Income Tax Returns and this expense is deducted from the taxable income.

Business owners can also get tax exemption on depreciation value as it is also considered a business expense. This exemption can be claimed even without taking a car loan.

3. What are the requirements for claiming tax benefits for a car loan?

Following are some important requirements for claiming a tax benefit on a car loan.

• The car owner has to show that the car is used for business purposes otherwise the tax claim can be rejected.

• The car should be purchased under the business name or in the name of the business owner to be eligible for tax deductions.

• If the car is being used for business as well as personal work, the tax exemption is allowed only for the ratio it is being used for business and the interest and depreciation are divided by the ratio of business and personal use.

• An interest certificate issued by the lender mentioning the interest payments will be required at the time of filing the income tax return.

4. What is the maximum deduction I can claim on a car loan?

Under Section 80C of the Income Tax Act, you can avail a maximum deduction of ₹ 1.5 lakhs on a car loan. This deduction is allowed only if you are a business owner or a self-employed individual.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.

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