The Interest paid on some types of Loans is allowed to be claimed as an Expense under the Income Tax Act. However, all types of interests are not allowed to be claimed as an expense.
The most common reasons for which people take loans are when they intent to buy a home or a car. It is fairly clear that the interest paid on home loan is allowed as a deduction in all cases.
However, the interest paid on car loan is not allowed as an expense in all cases. It is only allowed to be treated as an expense where the Car is being used for Business purposes.
If a Salaried person takes a Car Loan, then he cannot claim the Interest on Car Loan as an expense. Therefore, there would no treatment of the interest paid on Car Loan by the Salaried Employee.
Treatment of Interest on Car Loan used for Business Purpose
In such cases where the Car is being used for Business purposes, the interest paid on Car Loan is allowed to be treated as an expense which leads to lower taxable profits. This can be explained with the help of an example.
For eg: I take a 3 year Car Loan to purchase an Audi. The car loan interest rate is 10% and the loan amount is Rs. 30 Lakhs.
Assuming my taxable profits from my current business are Rs. 80 Lakhs. In this case, the treatment would be as follows:-
| Net Profits before Int. on Car Loan | 80,00,000 | |
| (Less) | 10% Interest on Car Loan (10% of Rs. 30,00,000) | 3,00,000 |
| (=) | Taxable Profits | 77,00,000 |
As the interest on car loan is allowed to be treated as an expense, this reduces the taxable profit which in turn reduces the Income Tax to be paid. Thus, as the interest on car loan is allowed to be treated as an expense, this reduces the income tax liability of the person availing the loan.
Other Relevant Points
- Only Interest paid allowed to be treated as an Expense and not the EMI paid.
This can be explained with the help of an example. In the above example, I had taken a Car Loan of Rs. 30,00,000 at 10% p.a. for 3 years.
The EMI in the above mentioned case is Rs. 63,741. Out of this Rs. 25,000 constitutes the interest part and Rs. 38,741 constitutes the Principal part.
Rs. 25,000 would only be allowed to be treated as an expense and not the principal repayment of Rs. 38,741. There would be no treatment of Rs. 38,741 from the point of view of Income Tax and it would only be considered as principal amount repaid.
- Depreciation on Car used for Business purposes
If a Car is used for business purposes, then Depreciation on Car can be claimed as an expense. This depreciation is allowed to be claimed irrespective of whether the car is purchased through loan or without a loan.
The depreciation on Car is allowed to be claimed @ 15% every year. This will again reduce the taxable profits even further and decrease the tax liability.
- Car used for Business and Personal Purpose
If the Car is used for both business as well as personal purposes, then we’ll have to apportion the interest and depreciation expense mentioned above in the ratio in which it is used for Business and Personal purpose.
Thus, if the car is used 50% of the time for business purpose and 50% of the time for personal purpose, only 50% of the above mentioned expenses would be allowed to be claimed as a business expense.
