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How to Get a Tax Benefit for Buying a New Car

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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.

Who Can Claim Tax Benefits For Buying A Car?

Here’s a distinction of who is eligible for claiming tax benefits for buying a car in India:

1. Self-employed professionals or business owners:

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. In addition, you may also claim a tax benefit by showing that the car is a depreciating asset and viewing this depreciation as a business expense.

2. Salaried individuals:

Generally, salaried individuals cannot claim tax benefits on a car if they are buying it for personal use. This is because, in this case, the car is a luxury item and, hence, the interest paid on the loan amount cannot be deemed as a business expense. However, there can be a few exceptions.

How To Claim New Car Tax Benefits?

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

1. Show business use:

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

2. Claim interest paid on car loan:

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

3. Claim depreciation:

As a car is a depreciating asset, the depreciation of the car is considered a business expense. Hence, under Section 32 of the Income Tax Act 1961, you can claim the depreciation on the vehicle used for business purposes at 15% on ICE cars annually. Remember that depreciation is free from tax whether the car is purchased using a car loan or without a loan.

4. Claim TCS:

When buying a car with an ex-showroom price of more than INR 10 lakhs, the showroom collects Tax Collected at Source or TCS at 1% of the sales value from the buyer. Check Form 26AS for this TCS entry and verify the number. When filing ITR, you can get this as a refund if you are eligible.

5. Mixed use:

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

In India, you have to pay a car insurance GST during policy purchase and renewal. Business owners can only claim tax benefits on comprehensive 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.

◦ Condition 1:

If the car is being used only for business purposes, the business has to provide bills, driving records and travelling history to claim tax deductions on car insurance premiums

◦ Condition 2:

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

On this note, you should be familiar with the topic of car insurance, rate new changes with GST 2.0. Fortunately, the new GST on car insurance premiums has stayed the same at 18%.

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. First-time use only:

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. Individual taxpayer:

Note that this benefit is only available to individuals. Businesses, companies and HUFs are not eligible for claiming this tax benefit.

3. Eligibility period:

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

4. Loan source:

The loan for the car must be taken from a recognised financial institution or non-banking financial company (NBFC).

On this note, do consider getting proper car insurance for your EV to secure it against unforeseen damages/losses. While a third-party car insurance is the minimum legal requirement, experts recommend a comprehensive plan due to its third-party liability and own damage cover.

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 they 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. Note that the benefit is available only on the interest value of the car loan and not the principal amount. Additionally, they can get a tax exemption on depreciation value, as it is also considered a business expense.

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

In order to claim tax benefits on a car loan, the car has to be registered under the name of the business or the business owner and shown to be used for business purposes. If the car is used for both business and personal use, then a tax exemption can be claimed by dividing the interest payment on the loan and depreciation in the ratio for which the vehicle is being used for business and personal purposes.

Also, at the time of filing ITR claims, an interest certificate, obtained from the lender, citing the interest payments, will be required.

4. What documents do I need for claiming the tax benefit for my EV under Section 80EEB?

If you are eligible to claim the tax benefit under Section 80EEB for your EV purchase, you will need to submit a handful of documents, such as the loan sanction letter, a copy of the repayment schedule, an interest certificate obtained from the lender and an invoice of the vehicle.

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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