Owning a vehicle has become more of a necessity than a luxury for many households in India. With the increasing availability of vehicle loans, more people are able to fulfill their dream of owning a car or two-wheeler, while also exploring the potential tax benefits on vehicle loans in India.

Vehicle loans have made it convenient for individuals to buy vehicles without bearing the entire cost upfront.

This article aims to provide a detailed and simple explanation of the potential tax benefits associated with vehicle loans in India, helping you understand how to make the most of these benefits.

Understanding Vehicle Loans in India

What is a Vehicle Loan?

A vehicle loan is a type of secured loan that allows individuals to purchase a vehicle, such as a car or two-wheeler, by borrowing money from a bank or financial institution. In this case, the bank will not keep the vehicle or the original paper to them, but it falls under the secured loan because banks can seize your car if you default on the loan.

The borrower pays back the loan in installments, commonly known as Equated Monthly Installments (EMIs). In India, vehicle loans can be availed for new or used vehicles, and they come with varying interest rates and repayment tenures. Generally, interest rate for pre-owned cars is higher than the new car loans.
There are different types of vehicle loans available in India:

• Car Loans: Loans for purchasing new or used cars.
• Two-Wheeler Loans: Loans specifically for purchasing motorcycles or scooters.
• Commercial Vehicle Loans: Loans to buy commercial vehicles for business purposes.

Eligibility Criteria for Vehicle Loans

To avail a vehicle loan, applicants must meet certain eligibility criteria. These include:

• Age: Most lenders require the applicant to be between 21 and 65 years of age.
• Income: Proof of stable income, either through employment or self-employment, is necessary to ensure repayment capacity.
• Credit Score: A good credit score is important to get favourable terms on the loan.
• Employment Status: Salaried individuals, self-employed professionals, and business owners are all eligible to apply.

Benefits of Vehicle Loans Beyond Taxes

Vehicle loans offer several benefits beyond tax savings:

• Lower Upfront Payments: You do not need to pay the entire cost of the vehicle upfront; the loan allows you to spread the payment over time.
• EMI Options: The repayment is done through EMIs, which makes it easier to manage your finances.
• Ownership Flexibility: You get to own the vehicle right away while paying for it over time.
• Building Credit History: Timely repayments of EMIs help in building a good credit history, which can be beneficial for future loan applications.
• Flexibility in Choosing Loan Amount: Depending on your requirements, you can choose the loan amount and tenure that suits your financial capacity.

Tax Benefits on Vehicle Loans for Self-Employed Individuals

Eligibility for Tax Deductions 

Self-employed individuals who use the vehicle for business purposes are eligible for tax benefits on the interest paid on the vehicle loan. These deductions can help reduce taxable income, making it a cost-effective way to finance a vehicle.

Section 36(1)(iii) of the Income Tax Act 

Under Section 36(1)(iii) of the Income Tax Act, self-employed individuals can claim the interest paid on a vehicle loan as a business expense. This benefit is available only if the vehicle is used for business purposes, such as meeting clients, transporting goods, or other business-related activities.
Example: If you are a self-employed architect and take a vehicle loan for a car used to visit clients and sites, the interest paid on the loan can be claimed as a business expense. This reduces your taxable income and, consequently, the tax payable.

Depreciation Benefits

In addition to claiming interest, self-employed individuals can also claim depreciation on the vehicle as an expense. Depreciation is the reduction in the value of an asset over time due to wear and tear. By claiming depreciation, you can further reduce your taxable income.
Depreciation Rates

The Income Tax Act allows for depreciation at a rate of 15% for vehicles used for business purposes. If the vehicle is used for more than 50% of the time in business, higher depreciation rates may apply.

Illustrative Example of Depreciation
Suppose you purchase a vehicle for business use at a cost of INR 10 lakhs. You can claim depreciation at 15%, which means INR 1.5 lakhs can be claimed as an expense each year. This further reduces your taxable income, resulting in significant tax savings over the years.

Tax Benefits for Salaried Individuals

Limited Tax Benefits for Salaried Employees

Salaried individuals generally do not receive direct tax benefits on vehicle loans. The interest paid on a car loan is not eligible for tax deductions under the Income Tax Act for personal use.

Indirect Benefits through Employer

Some salaried individuals may benefit indirectly if their employer offers a car lease policy as part of the salary package. In such cases, the employer provides the car, and the lease amount is deducted from the employee’s salary. This reduces the taxable salary and can lead to lower tax liability.

Example: If your employer provides a car lease and deducts the lease amount from your salary, it reduces your taxable income. The fuel and maintenance expenses may also be borne by the employer, further reducing the financial burden.

Car Lease Policies and Tax Savings

Employers may provide car lease policies that include fuel, maintenance, and insurance costs as part of the package. These costs are deducted from the employee’s salary before calculating taxable income, thereby reducing the overall tax burden.

Additionally, the GST paid on the lease can be claimed by the employer, which might be passed on as savings to the employee.

Business Use vs. Personal Use

Distinguishing Between Personal and Business Use

Tax benefits on vehicle loans depend on whether the vehicle is used for personal or business purposes. Vehicles used for personal purposes do not qualify for any direct tax benefits, whereas vehicles used for business purposes may qualify for deductions on interest and depreciation.

It is important to maintain proper records to substantiate the use of the vehicle for business purposes. This may include:

• • Logbooks: Maintaining a logbook to record business trips and mileage.
  • Invoices: Keeping invoices for fuel and maintenance expenses.
  • Fuel Receipts: Retaining fuel receipts that show the date and quantity of fuel purchased.

Examples and Scenarios

• • Scenario 1: A self-employed consultant uses a car to visit clients regularly. The interest paid on the vehicle loan and depreciation can be claimed as business expenses.
  • Scenario 2: A salaried individual uses a car for commuting to work. No direct tax benefits can be claimed.
  • Scenario 3: A business owner uses a vehicle for both personal and business purposes. In such cases, only the proportionate amount of expenses related to business use can be claimed for tax benefits.

Additional Costs and Their Tax Implications

Fuel and Maintenance Costs

For self-employed individuals and business owners, expenses like fuel, maintenance, and insurance can be claimed as business expenses if the vehicle is used for business purposes. These costs, when claimed, further reduce the taxable income.

Insurance Costs
Comprehensive vehicle insurance, which covers theft, damages, and third-party liabilities, can also be claimed as a business expense if the vehicle is used for business purposes.

Example: If you spend INR 50,000 annually on fuel and maintenance for a vehicle used for business purposes, this amount can be deducted from your taxable income, resulting in further tax savings.

Claiming GST Benefits
Business owners who are registered under GST can also claim input tax credit on the GST paid for the purchase of the vehicle, provided the vehicle is used for business purposes. This can help reduce the overall cost of acquiring the vehicle.

GST Input Credit Example
If you purchase a commercial vehicle for INR 10 lakhs, and the GST component is INR 1.8 lakhs, you may be eligible to claim the GST as an input tax credit, provided the vehicle is used exclusively for business purposes.

How to Claim Tax Benefits on Vehicle Loans

Documentation Required

To claim tax benefits on a vehicle loan, the following documents are required:

• • Interest Certificate: A certificate from the lender showing the interest paid during the financial year.
  • Proof of Business Use: Documents such as logbooks, fuel bills, and maintenance invoices to prove the vehicle’s business use.
  • Loan Agreement: The loan agreement with the financial institution to verify the loan details.

Filing Process

The tax deduction on vehicle loan interest can be claimed while filing your Income Tax Returns (ITR). Here’s a step-by-step guide:

• • Collect Documents: Gather all necessary documents, including the interest certificate and proof of business use.
  • Include in ITR: While filing your ITR, include the interest paid as a business expense under the relevant section.
  • Maintain Records: Keep all supporting documents in case of an audit by the tax authorities.
  • Depreciation Claim: Include the depreciation expense in your profit and loss statement if you are filing ITR-3 (for professionals and business owners).

Common Mistakes to Avoid

• • Claiming Personal Expenses: Do not claim expenses related to personal use of the vehicle as business expenses.
  • Inadequate Documentation: Ensure all necessary documents are maintained to support the claim.
  • Incorrect Categorization: Make sure that the vehicle loan interest is categorized correctly as a business expense and not a personal one.

Tax Implications of Selling a Vehicle

Impact on Tax Benefits

When a vehicle purchased with a loan is sold, any tax benefits claimed previously may have tax implications. If the vehicle was used for business purposes and claimed as an expense, the sale proceeds may be considered part of business income.

Accounting for Sale Proceeds

The sale proceeds of the vehicle must be added to your business income, and any profit or loss on the sale must be accounted for in your financial statements. If the sale price exceeds the written-down value, it results in a profit, which is taxable.

Capital Gains Tax

If the vehicle is sold for more than its written-down value (after depreciation), capital gains tax may apply. The gain is treated as a short-term or long-term capital gain, depending on the period of ownership.

Example: If a vehicle purchased for INR 10 lakhs is depreciated to INR 4 lakhs and then sold for INR 5 lakhs, the difference of INR 1 lakh will be treated as a short-term capital gain and will be subject to tax.

Is Taking a Vehicle Loan for Tax Benefits Worth It?

Cost vs. Benefit Analysis

While vehicle loans offer tax benefits, it is important to analyze whether the interest payments on the loan are justified by the tax savings. In most cases, the interest paid is higher than the tax benefit received.

Example: If you are paying an interest rate of 10% on a vehicle loan, and your tax savings are only 20-30% of the interest paid, the net cost may still be high. It is important to evaluate whether the convenience of owning a vehicle outweighs the financial cost.

Breakdown of Costs

Consider the following:

• • Interest Cost: Calculate the total interest payable over the loan tenure.
  • Tax Savings: Estimate the potential tax savings from the deductions.
  • Net Cost: Subtract the tax savings from the interest cost to determine the net cost of financing.

Points to Consider

• • Interest Rate: A lower interest rate reduces the overall cost of the loan.
  • Loan Tenure: Shorter tenures reduce the total interest paid.
  • Usage: Consider how much the vehicle will be used for business versus personal purposes.
  • Financial Planning: Ensure that the vehicle loan fits well into your overall financial plan and does not lead to financial strain.
  • Alternatives: Consider alternative options, such as purchasing a vehicle outright if you have sufficient savings or opting for a used vehicle to reduce costs.

Frequently Asked Questions (FAQs)

Can I get a tax deduction on a car loan if I am salaried?

No, salaried individuals cannot claim a tax deduction on a car loan if the vehicle is used for personal purposes. However, if the vehicle is used for official purposes through an employer-provided car lease policy, there may be indirect tax benefits. Sad to say, but middle class have to pay taxes.

How much interest can be claimed as a deduction for self-employed individuals?

Self-employed individuals can claim the full interest paid on the vehicle loan as a business expense, provided the vehicle is used solely for business purposes.

What documents do I need to prove business use of my vehicle?

You need to maintain a logbook, fuel bills, maintenance invoices, and other relevant documents to prove that the vehicle is being used for business purposes.

Can depreciation be claimed if the vehicle is partly used for business and partly for personal purposes?

Yes, depreciation can be claimed on a proportionate basis. If the vehicle is used 70% for business and 30% for personal use, you can claim depreciation only on the 70% business use portion.

Conclusion

Vehicle loans have made it easier for individuals to purchase vehicles without bearing the entire cost upfront. While vehicle loans offer certain tax benefits, especially for self-employed individuals using the vehicle for business purposes, the benefits are limited for salaried individuals using the vehicle for personal use.