Looking for tax benefit for your car loan? Here's when and how you can get tax deduction for your new vehicle purchase

Purchasing a car is a major financial and aspirational milestone for many Indians, and it can be exciting and stressful at the same time. Overall, the loan you choose must balance affordability and risk while keeping your financial health in good shape. 

When it comes to tax benefit, a key distinction between home loan and car loan is that the former allows you deductions for personal and business use, while the latter can only be claimed for business use in India. 

Who can and cannot claim tax benefit for car purchase?

Car loan for a vehicle purchased by a self-employed individual or business owner and reported as a business expense is eligible for tax relief. Further, benefit for car loan may not be available for all salaried individuals, unless they can prove the purchase is a business expense.

Notably, the benefit is available under both the old tax regime and new tax regime. 

Here's how taxpayers can claim benefits for your car: 

• Deduction under Section 80D: This is when self-employed individuals or business owners claim that the purchased car is for business purpose. 
• Depreciation: Depending on the type of car, you can claim depreciation on the asset (since it is a business purchase) based on applicable rates. 
• Fuel and maintenance expenses: You can also claim deductions for fuel and maintenance purposes of the business asset (car). 
• Loan deduction: To claim this, details of your car loan must be included in your Income Tax Return (ITR) filings, where interest paid toward the loan is reported as a business expenses. For this, you can approach your bank for the interest certificate which is to be submitted with your tax papers. 

Can I claim benefits if the car is for business and personal use?

Further, if your car is also used for personal reasons, you can only claim benefits for the official or business use — i.e. if you use it 60:40 for business vs personal reasons, you can only claim 60% of the expenses when filing taxes. It is thus important to keep detailed records of your car usage, fuel expenses, maintenance costs, and other relevant documents to support your tax claims.

Electric vehicles: Are there tax benefits?

The Indian government had announced a separate benefit for purchase of electric vehicles (EVs) to encourage a shift for the auto industry towards the sector. This was for loans sanctioned between 1 April 2019 to 31 March 2023 for the purchase of EV. No such benefit has been announced new or reinstated. 

Under 80EEB of the Income Tax Act EV buyers were eligible for tax deductions of up to ₹1,50,000 on the interest payment of the loan taken for the purchase.

Importantly, this one-time benefit was only available to salaried taxpayers. Here, the companies, firms and Hindu Undivided Family (HUF) were not eligible for tax benefit.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.