Photo: iStock
Photo: iStock

Car loan can give income tax benefit to self-employed

A car loan can help you save on tax if you are a self-employed professional

My wife and I earn 6.5 lakh annually. We save 15,000 per month. We want to buy a car worth 6 lakh after over a year. We want to raise 3.5 lakh through investments and the rest via car loan. Should we invest for a longer period?

—Jitendra Bhushan

Yes, you should try to save for a few more years before you go ahead to buy the car. It is better that you buy the car with self-raised funds instead of borrowed capital, which is an option when your employer has a company car lease policy or if you are self-employed as in both cases it becomes a case of better tax planning.

In your case, the car’s value is almost equal to your annual salary. On top of it, if you take a loan, the actual cost becomes quite high. And this is for an asset class which is depreciating in nature.

In case of a house, it is a little different and it is recommended to take a loan due to its capital value and because it’s an appreciating asset; tax advantage is additional.

Your savings of 15,000 per month, if done for 3 years, can give a capital value of 5.40 lakh and with an average earning rate of 10% you can accumulate a corpus of 6.3 lakh. You can reduce the period by saving a little more aggressively and increasing the savings every year. You can consider a systematic investment plan in equity hybrid funds.

I invest 4,000 per month in a small-cap fund through SIP. I want to start another SIP of 3,000. Should I invest in a high-risk or low-risk fund?

—Rocky Sharma

The portfolio allocation needs to be diversified and you can’t invest only in one asset class. Investment in a risky asset class i.e. equity and that too a small-cap fund, which is riskier within the equity asset class, should only be a part of your portfolio and not the complete portfolio. Within equity, create a mix of large-cap, multi-cap and mid-cap. Also, when investing in equity, make sure the investment horizon is more than 5 years.

Also consider the debt asset class as it gives protection from volatility. Investments can be done based on short- and long-term goals. For short-term, ultra short-term debt funds are a good option. For long-term debt investment, Public Provident Fund and bank fixed deposits (subject to taxation) can be bought.

To read more queries, go to

Surya Bhatia is managing partner of Asset Managers. Queries and views at